-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CJq2CQULF+hyZyfiHHpSJCmxnC1OX1Pnz0NGCqmijRBF88sErJ+Hb1YSnVf9iVV9 GMNKKfs8gZihsjbPMfaNNA== 0001047469-98-045227.txt : 19981230 0001047469-98-045227.hdr.sgml : 19981230 ACCESSION NUMBER: 0001047469-98-045227 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANACOMP INC CENTRAL INDEX KEY: 0000006260 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 351144230 STATE OF INCORPORATION: IN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08328 FILM NUMBER: 98776645 BUSINESS ADDRESS: STREET 1: 12365 CROSTHWAITE CIRCLE CITY: POWAY STATE: CA ZIP: 92064 BUSINESS PHONE: 6196799797 MAIL ADDRESS: STREET 1: 12365 CROSTHWAITE CIRCLE CITY: POWAY STATE: CA ZIP: 92064 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTEC INC DATE OF NAME CHANGE: 19740314 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 or [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. For the transition period from ___________to____________. Commission File Number (1-8328) ANACOMP, INC. (Exact name of registrant as specified in its charter) INDIANA 33-1144230 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12365 CROSTHWAITE CIRCLE, POWAY, CALIFORNIA 92064 (619) 679-9797 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- COMMON STOCK, $.01 PAR VALUE COMMON STOCK WARRANTS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant has filed all reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of Securities under a plan confirmed by a court. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, as of November 30, 1998, was approximately $131,714,358 (based upon the closing price for shares of the registrant's Common Stock as reported by the NASDAQ National Market for November 27, 1998, the last trading day prior to that date). Shares of Common Stock held by each of the registrant's officers and directors, and by a certain holder of more than 10% of the registrant's outstanding Common Stock, have been excluded in that such persons may be deemed to be affiliates of the registrant; however, this determination of affiliate status is not necessarily a conclusive determination for any other purpose. The number of shares outstanding of the registrant's Common Stock, $.01 par value, as of November 30, 1998 was 14,263,058 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant's 1999 Annual Meeting of Shareholders are incorporated herein by reference into Part III of this Report. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant's fiscal year ended September 30, 1998. ANACOMP, INC. FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 INDEX
PART I Page --------- Item 1 Business 1 Item 2 Properties 12 Item 3 Legal Proceedings 12 Item 4 Submissions of Matters to Vote of Security Holders 12 PART II Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters 15 Item 6 Selected Financial Data 16 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A Quantitative and Qualitative Disclosures About Market Risk 24 Item 8 Financial Statements 24 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 24 PART III Item 10 Directors and Executive Officers of the Registrant 25 Item 11 Executive Compensation 25 Item 12 Security Ownership of Certain Beneficial Owners and Management 25 Item 13 Certain Relationships and Related Transactions 25 PART VI Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 26 Signatures 29
PART I ITEM 1. BUSINESS Except for the historical information contained herein, the following discussion regarding Anacomp, Inc. ("Anacomp" or the "Company") contains forward looking statements that involve risks and uncertainties. Future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not specifically limited to, the ability to service debt, timely product development, fluctuations in currency exchange rates, availability and price of polyester and other supplies, and changes in economic conditions of various markets that the Company serves. DOCUMENT MANAGEMENT INDUSTRY Anacomp is a leading provider in the document management industry, which the Company believes to be in excess of $8 billion worldwide. The Company provides services and products utilized in the storage and distribution of, and access to, computer generated documents and various forms of document images. Users of these services and products must balance the ease of accessibility to information contained in these documents with the cost of storing and accessing that information. Historically, document management (storage, distribution and access of documents) was dominated by micrographics services and products, a segment in which Anacomp has achieved a sustained leading market position. Recent advances in digital technologies, which provide rapid access to electronic images of documents, have provided customers with document management alternatives to micrographics. Over the next several years, the Company believes that micrographics technology will continue to retain certain cost or functional advantages over alternative media, which should keep micrographics competitive in a wide range of applications. Over the longer term, the Company believes that micrographics technology will be viewed predominately as a reliable and cost-effective method for long-term document archival. Companies are increasingly faced with the competing challenges of reducing the costs, while improving the capabilities, of their information processing and management operations. Moreover, these challenges are being faced at a time when technology is advancing rapidly, which greatly increases the complexity of selecting and implementing the appropriate solutions. As a result, organizations increasingly are seeking outsourcing alternatives to reduce their overall cost and eliminate the complexity associated with constantly changing technology choices and implementation requirements. The Company's business strategy is to capitalize on these industry trends by leveraging its market position and competitive strengths to provide new services and products while maintaining its leading position in the traditional segments of the market. OVERVIEW OF THE COMPANY Anacomp is a leading provider of document management services and products to over 10,000 customers in more than 65 countries. The Company offers a broad range of document management solutions for the storage and distribution of, and access to computer generated documents utilizing micrographic, magnetic media and, to an increasing extent, electronic technologies. The Company has built a strong reputation as the world's leading full-service provider of micrographic systems, services, and supplies. Micrographics is the conversion of information stored in electronic form or on paper to microfilm or microfiche. Traditionally, micrographics has provided one of the most cost-effective means of document storage and retrieval for information-intensive organizations such as banks, insurance companies, brokerage firms, healthcare providers and government agencies. The Company is a worldwide provider of Computer-Output-to-Microfilm ("COM") solutions, which consists of the high speed conversion of computer generated documents directly from a computer or magnetic tape to microfilm or microfiche. The Company is a leading manufacturer of systems, as well as the leading provider of services for customers that outsource their micrographic requirements. Organizations are increasingly seeking outsource alternatives to meet their information processing and management needs. In order to reduce costs and improve capabilities, the Company believes that it is uniquely positioned to leverage its significant base of loyal, long-term customers to take advantage of the trends to outsourcing and the increasing use of new technologies in the industry. Anacomp believes it can take advantage of this trend by increasing its customer base through strategic acquisitions and by offering a broader range of services and products utilizing new technologies to complement its traditional micrographics business. In recent years, the Company increased the breadth of its services and products by incorporating certain new technologies being utilized in the document management industry. The Company has established itself as a leading global provider of Compact Disc ("CD") document management outsource services through the growth of its ALVA-TM- CD ("ALVA") services and through the Company's acquisition in 1997 of Data/Ware Development, Inc. ("Data/Ware"), a leading supplier of CD systems for document management applications. ALVA services are offered from a majority of the Company's service centers throughout the world, and this business has enjoyed significant growth over the past three years. The Company's Data/Ware CD systems generally are sold to businesses with high-volume CD output needs and who prefer to produce CDs internally rather than outsource this process. The Company has an extensive installed base of systems located at end-user operations, which together with the Company's strong customer relationships, provide the Company with a high margin recurring revenue stream from systems maintenance and related supplies. In addition, the Company is a leading provider of half-inch computer tape (magnetic media) products for larger computing systems, with manufacturing plants in the United States and Europe. Overall, the Company plans to maintain its leadership position in traditional document management solutions while continuing to capitalize on its expertise and customer base to add new document management products and services. This migration toward faster growth areas of the document management industry is being accomplished through internal product development, strategic alliances and acquisitions of companies and technology. BUSINESS STRATEGY The Company has a strategic plan entitled "Strategy 2000". Strategy 2000 sets forth the following four key strategies for the Company: PROVIDE CUSTOMERS WITH SOLUTIONS TO THEIR DOCUMENT MANAGEMENT REQUIREMENTS Anacomp has a large, long-term customer base with diverse document management requirements, and Anacomp desires to be the provider of choice for all of these requirements. By understanding the document management requirements of, and working closely with its customers, Anacomp gains insights into additional services and products it can offer to its customers. The Company intends to continue to broaden its range of services and products as it endeavors to capture all of its customers' business for all the document management services and products that its customers require. INCREASE MARKET POSITION AND PROFITABILITY IN TRADITIONAL BUSINESSES The Company has established leading positions in certain segments of the document management industry with its traditional businesses (micrographics and magnetic media). Although these segments and businesses are mature, Anacomp believes that opportunities remain to increase its market position in these segments and increase the contribution of these businesses to the Company's net sales and EBITDA (as defined). The Company will seek to increase its market position through strategic acquisitions and by leveraging its customer base for its other services and products. In addition, Anacomp continually strives to leverage its existing infrastructure and make strategic investments to achieve incremental operating efficiencies that would lead to increased profitability. 2 DEVELOP A LEADING POSITION IN ELECTRONIC DELIVERY AND ARCHIVAL SOLUTIONS With the rapid evolution and acceptance of the Internet worldwide, the Company believes it is presented with an opportunity to develop a leading position in the emerging electronic archival (long-term storage) and document delivery (access) services and products segment. As the Internet emerges as a widely accepted, standardized, low-cost medium for distribution of, and access to, documents and information, Anacomp will seek to leverage its extensive expertise and experience in document management to become a leading provider of a new generation of solutions utilizing this medium. The Company is pursuing these opportunities with initiatives such as its Computer Output to Internet ("COFI(TM)") services and its offerings with New Dimension Software, Inc. ("NDS") and is actively developing new offerings. PURSUE STRATEGIC ACQUISITIONS The Company will continue to pursue strategic acquisitions to expand its current capabilities and offerings. All of Anacomp's acquisitions will be focused in one or more segments of the document management industry that will be designed to increase its market position in current segments, add complementary services and products to its existing businesses, or add offerings in new businesses. DOCUMENT MANAGEMENT SOLUTIONS INITIATIVES Since June 1996, Anacomp has initiated several strategic initiatives to expand its range of services and products in the electronic document management market. Its three main initiatives are centered on using CD technology, using the internet or an organization's intranet system, and using mainframe and/or high-performance, server-based software solutions. Management of documents on CD-R involves the transforming, indexing, storing, distributing and providing access to documents stored on standard, inexpensive CDs. The Company believes the CD-R segment of the market is rapidly growing because CDs are extremely effective for the distribution of large volumes of electronically stored documents. The Company offers electronic delivery on CD through its ALVA outsource services and its high-volume Data/Ware CD MVS and Data/Ware CD Client/Server production systems. Anacomp offers its ALVA services through its network of outsource services centers in the United States and Europe and its Data/Ware CD MVS and Data/Ware CD Client/Server production systems through its worldwide direct and indirect sales channels. The ALVA Services revenues have grown approximately 117% and 183% during fiscal 1998 and 1997 respectively, as compared to their prior comparable periods. However, ALVA services revenues are still a relatively small percentage of the Company's total revenues. Management of documents using the internet or an organization's intranet involves the transforming, indexing, storing, distributing and providing access to documents stored on Webservers and accessible using Web browsers. The Company believes that the electronic delivery through the internet or intranet is a rapidly growing segment for the delivery of electronic documents to end-users. Anacomp offers such electronic delivery through its COFI outsource services which deliver documents to the customers' desktop using low cost, standard browser facilities. Although the COFI outsource service is a new product for the Company and is still small in terms of revenue generation, the Company believes that revenue from this service will grow rapidly. Management of documents using mainframe and/or high-performance servers based on software solutions delivers documents to a customer's desktop or high-speed printer. This method of delivery and archival involves the transforming, indexing, storing, distributing, and providing access to documents stored on large scale mainframes or server systems. Anacomp offers document management using enterprise-wide computing systems and networks through its EOM system, in conjunction with the Company's technology partner, NDS. The Company introduced its EOM system as an offering in late January 1998 and is marketing the product to its current customer base and to customers of the Company's competitors in the micrographics segment of the market. 3 COMPETITIVE STRENGTHS LONG-TERM CUSTOMER RELATIONSHIPS The Company has developed long-term relationships (in excess of five years) with many of its customers. Among the Company's current long-term customers are Aetna Inc., AT&T Corp., Automatic Data Processing, Inc., BankAmerica Corporation, Bank One Corp., Citicorp, Deutsche Bank AG, Electronic Data Systems, FMR Corp., General Electric Corp., IBM, and Travelers Group Inc. The Company believes that it has developed this long-term customer base by consistently meeting or exceeding customer document and information management needs and expectations. The Company manages these customer relationships through its worldwide sales force of approximately 200 individuals and through its extensive distributor networks. LEADING MARKET POSITION The Company is a leader in certain businesses within the document management industry including systems, maintenance and supplies, outsource services, certain half-inch magnetic media products, and digital based document management services and products. The Company's market position and customer base provides the necessary platform to grow these businesses and to introduce new and complementary document management services and products. UNDERSTANDING OF CUSTOMERS' DOCUMENT MANAGEMENT REQUIREMENTS Through its long-term customer relationships, Anacomp has developed an understanding of its customers' unique document management requirements as well as the particular document management requirements in its customers' industries. This understanding has enabled the Company to recognize and meet the changing needs of its customers. In addition, the Company believes that because of this understanding, its customers trust Anacomp to properly and securely process their critical documents and information. BROAD RANGE OF SERVICES AND PRODUCTS In the last two years, the Company has introduced new services and products designed to further broaden its offerings across the entire spectrum of document management. In addition to enhancing its traditional services and products, the Company has become a leading provider of document management CD solutions through the development of its ALVA services and through the acquisition of Data/Ware and its CD systems business line. The Company is also introducing complementary services related to its existing offerings, including on-line solutions, document management consulting services, enterprise-scale report management software products in partnership with NDS, and new magnetic media products, services and equipment. FIRST IMAGE ACQUISITION The Company believes the acquisition of First Image Management Company ("First Image") will strengthen its outsource service business, increase its already significant customer base, and enhance revenues and profitability through cross-selling opportunities and cost savings associated with consolidating the businesses. The addition of the First Image business will increase the Company's production capacity and expand the geographic coverage of its services. The Company believes it will be able to capitalize on cross-selling opportunities by leveraging the additional customer base with new service and product offerings. EXPERIENCED MANAGEMENT TEAM The Company's management team has an average of 17 years of experience in the information technology, document management and related industries and is committed to executing the Company's business strategy. The Company continues to recruit managers and other professionals from other successful companies and to promote from within when appropriate. 4 FIRST IMAGE ACQUISITION On June 18, 1998, the Company completed its acquisition of First Image, the primary component of which was Image Access Services, principally COM and CD services (the "IAS Business"). The Company disposed of the two remaining components of the First Image businesses, which included Document Print and Distribution Services, primarily laser print and mail and demand publishing services ("the DPDS Business"), and Document Acquisition Services, primarily data entry and data capture services (the "DAS business"). The details of the First Image acquisition and the subsequent disposals of the two business lines discussed above is further discussed in Note 7 of the Notes to the Consolidated Financial Statements included herein. DESCRIPTION OF IAS BUSINESS The IAS Business provided a variety of document management services. These services, which are substantially the same as Anacomp's services business, include the transfer of computer-generated documents, such as reports, statements and invoices to microfilm, CD, and other electronic format. See "Offerings - Outsource Services." For the four months ended September 30, 1998, the revenues of the IAS Business were approximately $37.7 million, with 74% of those revenues coming from Outsource Services. Much of the remaining revenue came from the sale of supplies and equipment related to the COM system market including microfilm, microfiche readers, and chemicals. Prior to the acquisition, the IAS business was a maintenance and supplies customer of Anacomp generating quarterly revenues of $2.5 million. Prior to the acquisition, the IAS Business operated 42 production centers geographically dispersed throughout the United States and had over 750 employees. Like Anacomp, the IAS Business has focused on maintaining strong client relationships, and has an annual client retention rate of approximately 90%. The IAS Business also utilized innovative technology, such as on-line ordering and status reporting in its sales and marketing efforts. INTEGRATION OF IAS BUSINESS The acquisition of the IAS Business will result in significant opportunities for operational savings and efficiencies when combined with Anacomp's existing services and facilities. The Company and the IAS Business operated outsource service centers in 23 of the same cities or metropolitan areas in the United States, which affords the Company opportunities for consolidation. The Company will consolidate 46 service centers into 23 locations by the end of fiscal 1999. In cities with an IAS Business service center location and without an Anacomp center, the Company will continue to operate those centers or perform a natural consolidation into existing Anacomp centers as trends in the market dictate. As of September 30, 1998, the Company had completed eight location consolidations. The corporate operations of the IAS Business have been relocated to Anacomp's Poway, California offices and into the existing Anacomp corporate operations, which will allow for consolidation savings. Achievement of the consolidation plan has required an investment in production and communications capital equipment to increase overall capacity and has required additional leasehold improvements to accommodate the combined operations. The investments in capacity and leasehold improvements have been factored into the consolidation plan. OFFERINGS Anacomp operates in a single industry generally known as the document management industry, and it offers a wide range of services and products within this industry. These solutions can be grouped into five major business lines: outsource services, technical services, systems, micrographics supplies, and magnetic media. 5 The table below shows Anacomp's revenues for each of these product families for the last three fiscal years. The information is presented on a traditional comparative basis for the year ended September 30, 1996 to facilitate a meaningful comparison to fiscal year 1997 and 1998. Consequently, the fiscal 1996 information presented below does not comply with accounting requirements for companies upon emergence from bankruptcy, which calls for separate reporting for the newly reorganized Company and the predecessor company. (Dollars in thousands.)
Year ended September 30, --------------------------------------------------------------------- 1998 1997 1996 -------------------- -------------------- ------------------- Outsource Services...... $ 152,805 31% $ 103,595 22% $ 103,733 21% Technical Services...... 72,837 15 77,123 17 82,105 17 Systems................. 51,468 10 39,985 9 32,794 7 Micrographics Supplies.. 111,413 22 131,615 28 150,449 31 Magnetic Media.......... 104,592 21 102,823 22 112,187 23 Other................... 5,902 1 7,369 2 4,872 1 --------- ------- --------- ------- --------- ------ Total.............. $ 499,017 100% $ 462,510 100% $ 486,140 100% --------- ------- --------- ------- --------- ------ --------- ------- --------- ------- --------- ------
OUTSOURCE SERVICES The principal outsource services delivered by Anacomp are computer output to microfilm and computer output to CD services, which are delivered through the Company's 78 service centers throughout the world. Outsource services are sold by Anacomp's direct sales forces in the United States, Canada, Brazil and Europe. The Company began offering outsource services to customers outside the United States in January 1997 with an acquisition in Italy. Since then, the Company has continued to increase its presence in strategic geographic areas through the acquisition of selected service centers. The Company has recently introduced COFI services, which deliver electronic documents to the users desktop using the internet and/or the organizations' intranet. The Company has a large customer base which has proved to be loyal to the Company in the past. The Company's outsource service customers include banks, insurance companies, brokerage firms, healthcare providers, and government agencies. No one customer accounted for more than 5% of the Company's outsource services revenues in fiscal 1998. The typical service contract is exclusive, lasts one year or more with a one-year, automatic renewal period and provides for usage-based monthly fees, which are subject to increase on 30 days' notice. The Company believes approximately 75% of the Company's Outsource Services customers are under contract and estimates approximately 90% of such contracts are renewed annually. COM SERVICES. COM services, the delivery of microfilm-based outsourcing services, represents the largest component of Anacomp's outsource services. On a daily basis, Anacomp's service centers receive thousands of electronic transmissions and magnetic tapes from customers. This information (both text and graphics) is converted to microfiche, which is a four by six inch film medium capable of storing up to 1,000 pages of computer generated documents. Turnaround for a typical outsource job ranges from two hours to 36 hours, depending on specific circumstances and requirements, and the centers generally operate 24 hours a day every day of the year. The Company believes it is the only national provider of COM services and competes with regional and local providers. ALVA CD SERVICES. Although still a relatively small percentage of the Company's revenues, Anacomp has quickly become a significant provider of CD outsource services since entering this emerging market in fiscal 1995. Competition in this segment is highly fragmented, and Anacomp believes it is the largest U.S. provider of CD outsource services. Anacomp's ALVA services provide customers with an easy, high-capacity document storage, distribution and access solution for applications requiring frequent and high-speed document access. End user documents, such as invoices and statements, are indexed and stored on recordable compact discs (known as CD-R discs). In addition to indexed information within documents, ALVA includes sophisticated Windows-based software for accessing and viewing the documents and information. ALVA production systems are available at the majority of the Company's service centers in the United States and at selected locations internationally. 6 The Company believes that its ALVA solution has significant advantages over competing products, primarily due to the Company's network of service centers, its extensive knowledge of applications and indexing expertise, and ALVA's flexible and easy-to-use human interface. COFI INTERNET SERVICES. Anacomp provides COFI services from several of its service centers in the United States, providing for the immediate access to computer-generated documents using a standard internet browser (such as Netscape or Microsoft Explorer) for its COFI services customers. The indexed, viewable documents are stored on an Anacomp Web Server or on the customer's internal Web Server, providing internal or external customers with immediate access to information contained in these documents from their electronic desktop using standard internet browser technology. TECHNICAL SERVICES (FIELD MAINTENANCE) Anacomp's technical services, which are traditional field maintenance services, are sold by Anacomp's direct sales forces worldwide. The Company provides round-the-clock maintenance and support services through more than 500 highly trained service employees in the United States, Brazil, Canada, and Europe which serve approximately half of the nearly 3,500 COM Systems believed to be in use worldwide. Its technical services reach is further expanded by its distributors in those regions where Anacomp does not maintain a direct, operational presence. In the United States, over 300 field service engineers and managers provide geographic coverage throughout ten regions. Internationally, maintenance services are provided either by Anacomp employees operating in the Company's foreign subsidiaries or by authorized distributors. The Company believes that it maintains virtually all of the installed base of Anacomp-manufactured COM systems, as well as a large percentage of those built by other manufacturers. In addition, the Company provides maintenance services for micrographics-related devices and, increasingly, equipment outside of the micrographics segment (such as high-speed laser printers, tape subsystems and optical and CD systems). Since many customers tend to use the maintenance services of the supplier that installed the system, maintenance revenues traditionally have been a function of new system sales and the size of the installed base. Anacomp believes that it is the leading provider of COM system maintenance in the United States and Europe. As the micrographics business matures, the Company's strategy is to leverage its maintenance infrastructure by expanding the services it provides to include equipment beyond the micrographics segment. Recent additions to the Company's maintenance base include computer tape subsystems and automated tape libraries, tape cleaning and conversion equipment, and optical and CD storage systems. The Company added maintenance of high-speed laser printers to its offering with the acquisition of two small laser printer maintenance providers in December 1997 and May 1998. Subsequent to year end, the Company further strengthened its high speed laser printer maintenance offering through an acquisition in the United Kingdom. SYSTEMS The principal systems delivered by Anacomp are COM systems, CD systems, Enterprise Report Management Systems, and document imaging systems. The Company sells these products through its direct sales forces in the United States, Brazil, Canada, and Europe and through distributors in Latin America, and parts of Europe and Asia. No single customer accounted for more than 5% of the Company's system sales in fiscal 1998. COM SYSTEMS. Anacomp is the world's leading manufacturer and distributor of COM systems, offering a complete line of processors, duplicators, sorters, and related software. Anacomp's installed base of systems and related sales of field maintenance services and supplies to its installed base provide the Company with what management believes to be a recurring revenue stream that constitutes a significant portion of its annual revenues. The Company's XFP 2000 is the most advanced COM system on the market and has enabled the Company to capture what it believes to be a significant number of all new systems sold or leased. The Company sold or leased 140 XFP 2000 systems in fiscal 1998 compared to 135 systems in fiscal 1997. Principal customers for the Company's systems include document-intensive organizations such as banks, insurance companies, brokerage firms, healthcare providers, and all levels of government agencies, as well as 7 non-Anacomp outsource service providers. While the majority of systems are sold outright, customers are increasingly selecting leasing plans and monthly usage options. The Company's primary competitors in the sale of COM systems are Agfa-Gevaert AG ("Agfa") and Micrographic Technology Corporation. Competition is based principally on product features, as well as on such factors as product quality, service, and price. The Company believes the worldwide installed base of systems is approximately 3,500 units, which offers a continuing replacement market opportunity for the Company's XFP 2000. CD SYSTEMS. Anacomp became a leading provider of document output to CD systems for mainframe and client/server computer environments through its acquisition in fiscal 1997 of Data/Ware. The Company's flagship Data/Ware products, the Data/Ware CD MVS and the Data/Ware CD Client/Server, provide companies with internal solutions for the highly automated output of documents to CDs. The Company's CD systems are sold by its direct sales force worldwide and also by distributors in Latin America and Asia. Because of the similarity between the Company's CD and COM systems relating to target markets, applications, and sales cycle, the Company believes it can leverage its extensive micrographics knowledge and customer relationships to grow sales of CD systems. In addition, the Company has begun maintenance services for its Data/Ware CD systems, creating a recurring revenue stream for installed units. The Company's primary competitors in the sale of high-volume CD output systems are Young Minds, Inc., Rimage Corporation, and, to a lesser extent, IBM. These products primarily compete in mid-volume applications. In the high-volume CD system market, the Company believes that it has the leading market position. The Company also has a significant installed base of well known clients with document output to CD systems. ENTERPRISE REPORT MANAGEMENT (ERM) AND DOCUMENT IMAGING SYSTEMS. Anacomp is working actively to bring to market a wide range of electronic document management system solutions. The Company provides on-line report distribution, archive and document imaging solutions through its October 1997 acquisition of Com-Informatic, the leading micrographics services provider in Switzerland and also a developer of advanced ERM and document imaging solutions for the European market, which is marketed under the name "Image Star". The Company also markets an ERM offering for document management that it obtains from NDS under the brand name Enterprise Output Management ("EOM"). Launched by the Company in late January 1998, EOM provides document management solutions for mainframe/host and client/server computing environments that allow organizations with significant document storage, distribution and access requirements to expedite access regardless of the document's location. Although there are numerous competitors providing a variety of electronic document management solutions, the Company believes it can be among the first to offer a complete range of solutions, both analog and digital, that address all of a customer's document management needs. MICROGRAPHICS SUPPLIES Anacomp sells the most comprehensive line of micrographics supplies in the world, including original silver halide film, duplicate film, chemicals for microfilm processing, paper and toners for reader/printers, micrographics lamps and bulbs and other consumables. These products are sold through Anacomp's direct sales forces and through distributor channels. The Company supplies wet and dry original silver halide film used in its XFP series of systems and wet and dry original silver halide film for its X-series, an earlier generation of Anacomp systems. All original microfilm for the Company's COM systems is manufactured for the Company by Eastman Kodak Company ("Kodak") under an exclusive supply agreement. The microfilm products for the XFP 2000 are manufactured for the Company by Kodak in what the Company considers to be a proprietary package. The Company also believes it can maintain its market position in XFP 2000 film sales going forward because of the complexity of the manufacturing process and the Company's patents on its proprietary canister. Anacomp is the world's largest distributor and seller of duplicate microfilm, which is used to create one or more additional copies of original microfiche and microfilm masters. All duplicate microfilm is manufactured for the 8 Company by SKC America, Inc. under an exclusive supply agreement. See "Raw Materials and Suppliers" below. Anacomp's primary competitor in the duplicate microfilm market is Rexham Graphics Ltd. ("Rexham"). The Company also sells original non-proprietary microfilm for Anacomp's older COM systems and for other manufacturers' systems. Film sold for Anacomp's systems represents the vast majority of original microfilm sales. The Company competes in sales of non-proprietary original microfilm with other manufacturers, including Agfa, Fuji Photo Film U.S.A., Inc. ("Fuji"), and Kodak. For non-OEM sales of the XFP 2000, the Company is the exclusive supplier of original microfilm because of the proprietary nature of the canister in which the film is placed. Anacomp believes that it sells its consumable supplies directly to more than 90% of its worldwide installed base. In foreign locations, the Company offers supplies through wholly owned operating subsidiaries and, in countries in which the Company does not have a subsidiary, through a network of dealers and distributors. In Europe, the Company's primary competitors for micrographics supplies are Agfa, A. Messerli AG, and Rexham. Its primary competitors in Asia are Kodak and Fuji. MAGNETIC MEDIA Anacomp manufactures, sells, and distributes a broad range of magnetic media products such as open reel tape, 3480/3490E tape cartridges, CompacTape, voice logging, instrumentation tape and transfer (magnetic stripe) tape. In addition, the Company distributes and sells 3590E tape cartridges, DLT tape cartridges, and quarter-inch, 4mm and 8mm back-up tape cartridges. The Company is the world's largest manufacturer of chromium dioxide half-inch tape products (open reel tape, 3480, 3490E, and TK 50/52), widely used by organizations for the near-line and off-line storage of business data. These products are manufactured at the Company's facilities in Graham, Texas and Brynmawr, Wales. The Company has entered into partnerships to enable it to participate in the next generation of magnetic media products, particularly half-inch metal particle tape (3590 cartridges), and it plans to make modest investments in this area. The Company also plans to expand the magnetic media - -related services it offers to its customers; such services include label initialization, library planning, media cleaning and conversion, and disaster recovery. Anacomp primarily sells its magnetic media products through a worldwide distributor and dealer network and, to a lesser extent, through the Company's direct sales force. The Company markets these products under the "Memorex," "Dysan," "Graham," and "StorageMaster" brand names, and it also is a leading OEM for many of the magnetic media products it manufactures. The Company has a leading manufacturing and market position for the products it makes. The Company has no significant competitors with respect to the manufacture of open reel tape, and its worldwide manufacturing and market position for 3480 and 3490E cartridges are estimated at 38% and 35%, respectively. The Company's major competitors for half-inch tape cartridges are Imation Enterprises Corporation (formerly 3M) and Emtech Magnetics GmbH (formerly BASF Magnetics GmbH). The Company has recently introduced magnetic media services and related equipment for certification, reproduction and cleaning. OTHER-CONSULTING SERVICES Recently, Anacomp has identified professional services and consulting services as important growth areas. As a result, the Company acquired WorkSmart, Inc., a small professional consulting services business in January 1998. The Company's business strategy calls for professional services to be offered as an adjunct to Company-provided services and products and for consulting services to be a stand-alone business offering customers a sophisticated level of guidance regarding document management strategies and solutions. ENGINEERING, RESEARCH, AND DEVELOPMENT Anacomp's engineering costs, including research and development, were $9.2 million in fiscal 1998, compared to $7.7 million in fiscal 1997 and $4.5 million in fiscal 1996. The Company expects its current research and development efforts to increase as it introduces new document management solutions. 9 Development in fiscal 1998 included continued improvement of the speed and the functionality of the XFP2000, as well as enhancements to the ALVA CD outsource services offering. In addition, significant investment was made in the development of the COFI offering including requirements to meet emerging market trends in this fast-moving area. Due to continued market development and the need to replace older generation hardware components, the Data/Ware CD System was reengineered and enhanced once again, extending its market-leading position. The Company also continues to invest in the automation of its service center operations and to provide advanced electronic data transmission capabilities for these centers. Finally, the Company maintained active development programs to evaluate, test, and implement Year 2000 compliance for its offerings. The Company also owns various patents and licenses covering aspects of its business lines and its production processes, as well as proprietary trade secret information relating to its services and products. While the Company believes that the protection provided by these patents, licenses and proprietary information is important, the Company believes that equally significant is the knowledge and experience of its employees, and their abilities to develop and market the Company's services and products and to provide value-added benefits to customers. RAW MATERIALS AND SUPPLIERS Polyester is the principal raw material used in the manufacture of both microfilm and magnetic media products. Costs for polyester remained generally stable in fiscal 1998, as a result of a relative balance between supply and demand. There can be no assurance, however, that the current trend will continue. SKC America, Inc. and SKC Limited (collectively, "SKC") is Anacomp's sole supplier of duplicate microfilm, under a ten-year supply agreement entered into in 1993. SKC also provides Anacomp with polyester for a large percentage of its magnetic media products. In connection with the supply agreement, SKC also provided Anacomp with a $25 million trade credit facility, which was reduced to $15 million in fiscal 1997, and further reduced to $5 million in the first half of fiscal 1998. In addition, under an amendment to the supply agreement executed in 1996, Anacomp agreed to certain price increases, retroactive to 1994, and agreed to make deferred payments to SKC related to the retroactive price increases. The Company has recognized the liability and is committed to pay $0.8 million, $0.8 million, and $1 million in 1999, 2000, and 2001, respectively. Pursuant to the SKC agreement, the Company is required to purchase a substantial portion of its polyester requirements from SKC for its magnetic media products. While the Company could purchase certain of these magnetics polyester products from vendors other than SKC, SKC is currently the sole available source for polyester used by the Company to manufacture many magnetic products. Anacomp's XFP 2000 system utilizes a proprietary, patented original film canister, and the original film used in that canister is supplied exclusively by Kodak. Anacomp also purchases from Kodak substantially all of its requirements for original microfilm for earlier-generation systems manufactured by Anacomp and others, although the Company has from time to time purchased original microfilm utilized in those older systems from other suppliers. INDUSTRY SEGMENTS AND FOREIGN OPERATIONS As discussed in Note 1 to the Consolidated Financial Statements, Anacomp's business operates as a single unit providing equipment, supplies, and services for document management, including storage, processing, and retrieval. Financial information concerning the Company's operations in different geographical areas is included in Note 19 of the Notes to the Consolidated Financial Statements. 10 BANKRUPTCY REORGANIZATION On January 5, 1996, the Company filed a petition for reorganization under Chapter 11 of the Bankruptcy Code with the U.S. Bankruptcy Court for the District of Delaware. On March 28, 1996, the Company submitted a Plan of Reorganization and a Disclosure Statement to the Bankruptcy Court. The Disclosure Statement was approved by the Bankruptcy Court on such date and was transmitted to the creditors and preferred stockholders of the Company for solicitation of ballots for acceptance or rejection of the Plan of Reorganization. Ballots were cast by May 8, 1996. The Plan of Reorganization, as amended, was confirmed by the Bankruptcy Court on May 20, 1996, and, on June 4, 1996, the Company emerged from bankruptcy under its Plan of Reorganization. ASSOCIATES As of September 30, 1998, Anacomp employed approximately 3,400 people at multiple facilities and offices in the United States, Canada, Brazil, Japan, and Europe. 11 ITEM 2. PROPERTIES The Company's headquarters are located in Poway, California. This facility houses the Company's management, systems manufacturing, software development, engineering, customer service, marketing, technical service operations, finance, accounting and MIS groups. The Company also leases standard office space for its sales and service centers in a variety of locations around the world. Anacomp's magnetics manufacturing facilities are located in Graham, Texas and Brynmawr, Wales. All of Anacomp's manufacturing facilities have received international recognition for quality standards and have earned International Standards Organization ("ISO") 9002 certification. The following table indicates the square footage of Anacomp's facilities:
OPERATING OTHER FACILITIES FACILITIES TOTAL ---------- ---------- ----- United States: Leased................. 1,441,466 132,714 1,574,180 Owned.................. 147,420 15,630 163,050 --------- ------- --------- 1,588,886 148,344 1,737,230 --------- ------- --------- International: Leased................. 140,990 19,092 160,082 Owned.................. 167,478 --- 167,478 --------- ------- --------- 308,468 19,092 327,560 --------- ------- --------- Total................ 1,897,354 167,436 2,064,790 --------- ------- --------- --------- ------- ---------
Other Facilities consist primarily of leased space of abandoned facilities. Approximately 151,806 square feet of the Other Facilities have been sublet to others. The Company considers its facilities adequate for its present needs and does not believe that it would experience any difficulty in replacing any of its present facilities if any of its current agreements were terminated. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are potential or named defendants in several lawsuits and claims arising in the ordinary course of business. While the outcome of such claims, lawsuits or other proceedings against the Company cannot be predicted with certainty, management expects that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the financial statements of the Company. On August 29, 1997, Access Solutions International, Inc. ("ASI") filed a complaint for patent infringement in the U.S. District Court, District of Rhode Island, against Data/Ware Development, Inc. ("Data/Ware"), of which Anacomp is the successor by merger, and Eastman Kodak Company ("Kodak"). The complaint seeks injunctive relief and unspecified damages, including attorney's fees, for alleged infringement by Data/Ware and Kodak of ASI's United States Letters Patent No. 4,775,969 for "Optical Disk Storage Format, Method and Apparatus for Emulating a Magnetic Tape Drive" and No. 5,034,914 for "Optical Disk Storage Method and Apparatus with Buffered Interface." The Company has assumed the defense of this matter on behalf of both Data/Ware and Kodak. Discovery in this matter continues, with any trial to occur probably not before the middle of calendar year 1999. Although there can be no assurance as to the eventual outcome of this matter, the Company believes that it has numerous meritorious defenses which it intends to pursue vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the three months ended September 30, 1998, to a vote of Anacomp's security holders through the solicitation of proxies or otherwise. 12 EXECUTIVE OFFICERS OF THE REGISTRANT The current executive officers of the Company, their ages (as of December 15, 1998) and their positions with the Company are listed in the following table:
NAME AGE POSITION - ------------------------- ------- ------------------------------------------------------------------- Ralph W. Koehrer 53 President, Chief Executive Officer and Director Frederick F. Geyer 49 Executive Vice President Donald W. Thurman 52 Executive Vice President Donald L. Viles 52 Executive Vice President and Chief Financial Officer Peter Williams 46 Executive Vice President William C. Ater 58 Senior Vice President, Chief Administrative Officer and Secretary Jeffrey R. Cramer 45 Senior Vice President William E. Farrant 44 Senior Vice President George C. Gaskin 39 Senior Vice President, General Counsel and Assistant Secretary Hasso Jenss 55 Senior Vice President Richard V. Keele 49 Senior Vice President Thomas J. Magazzine 53 Senior Vice President Stephen C. Manske 53 Senior Vice President Kevin M. O'Neill 44 Senior Vice President Gary M. Roth 56 Senior Vice President Emery E. Skarupa 46 Senior Vice President Thomas L. Brown 42 Vice President and Treasurer
The business experience of each executive officer for the past five years is described below. Each executive officer is elected for a term of one year and holds office until his successor is chosen and qualified or until his earlier death, resignation or removal. RALPH W. KOEHRER was elected Chief Executive Officer and Director (effective May 1, 1997) on April 29, 1997 and President (effective January 6, 1997) on December 10, 1996. Prior to joining the Company, Mr. Koehrer was with Automatic Data Processing, Inc. ("ADP") for eleven years, most recently as Corporate Vice President of ADP and as President of ADP's Information and Processing Services division. FREDERICK F. GEYER joined Anacomp in January 1998 as Executive Vice President. Before joining Anacomp, Dr. Geyer was with Texas Instruments, Inc., where Dr. Geyer served as Senior Vice President for digital imaging from August 1996 to December 1997. Prior to that, Dr. Geyer worked for Eastman Kodak Company where, during his tenure, his responsibilities included hardware/software design and development, marketing and sales for digital imaging products, and the start-up of an optical storage business. DONALD W. THURMAN was elected Executive Vice President on November 16, 1998, having served as Senior Vice President and General Manager - Outsourcing Services Business since May 4, 1998. From November 1997 to May 1998, Mr. Thurman served as Senior Vice President and General Manager - North America East. Mr. Thurman served as Senior Vice President - U.S. East from August 1997 to November 1997, and as Region Vice President - U.S. Group from October 1996 to August 1997. From November 1993 to October 1995, Mr. Thurman was Senior Vice President of Marketing and Business Development for First Image. Mr. Thurman served as General Manager of The Software Factory from January to November 1993 and previously served as Senior Vice President of the Company from January 1990 to January 1993. DONALD L. VILES was elected Executive Vice President and Chief Financial Officer effective March 1, 1996. From October 1985 to March 1996, he served as Vice President and Controller. PETER WILLIAMS was elected Executive Vice President on November 16, 1998, having served as Senior Vice President and General Manager - International Business since November 1997. From October 1995 to November 1997, Mr. Williams served as President - Magnetics Group. Previously, Mr. Williams served as General Manager 13 - - Magnetics European Group from 1993 to September 1995. Prior to that, Mr. Williams served from 1990 to 1993 as Vice President, Wales Operations - - Magnetics. WILLIAM C. ATER was elected Senior Vice President on August 13, 1997 and Chief Administrative Officer in February 1988. He has served as Secretary since March 1985. JEFFERY R. CRAMER was elected Senior Vice President - Technical Services on August 13, 1997. Mr. Cramer joined Anacomp in July 1996 with the Company's acquisition of COM Products, Inc. ("CPI"), and served as Senior Vice President-Business Development from February to August 1997. Mr. Cramer had served as President of CPI since March 1987. WILLIAM E. FARRANT was elected Senior Vice President - Support Services on November 16, 1998 and had served as Senior Vice President - Service Center Support since February 1998. Mr. Farrant had previously served as Vice President - - U.S. Group Operations from October 1994 to January 1998. Prior to that, Mr. Farrant was Director - Product Management from December 1992 to October 1994. GEORGE C. GASKIN was elected Senior Vice President, General Counsel and Assistant Secretary on November 17, 1997 and had served as Vice President - Legal and Assistant Secretary since June 1996. From July 1990 to June 1996, Mr. Gaskin served as Corporate Counsel and Assistant Secretary. HASSO JENSS was elected Senior Vice President and General Manager - COM Systems and Supplies on February 9, 1998 and had served as Senior Vice President and General Manager - Europe since August 1997. From October 1995 to August 1997, Mr. Jenss served as President - European Group. Mr. Jenss served as Vice President - European Micrographics from November 1993 to September 1995. Prior to that, Mr. Jenss served from October 1989 to October 1993 as Managing Director of Anacomp's German subsidiary. RICHARD V. KEELE was elected Senior Vice President - Product Development on May 4, 1998 and had served as Senior Vice President and General Manager - CDS Cluster since August 1997. Mr. Keele joined Anacomp in January 1997 with the Company's acquisition of Data/Ware, and was elected President - Data/Ware Group in February 1997. Mr. Keele had previously served as President of Data/Ware for more than five years. THOMAS J. MAGAZZINE was elected Senior Vice President and General Manager - Consulting Services on May 4, 1998 having joined Anacomp with its acquisition of WorkSmart in January 1998. Prior to joining Anacomp, Mr. Magazzine had been President and Chief Executive Officer of WorkSmart since 1996. Before launching WorkSmart, Mr. Magazzine founded GTE Vantage Solutions in 1990, a company which implemented information technologies for process-level reengineering. STEPHEN C. MANSKE was elected Senior Vice President - Digital Services on November 16, 1998, and has served as Senior Vice President since May 1998. From November 1997 to May 1998, Mr. Manske served as Senior Vice President - COFI Cluster. Mr. Manske had previously served as Senior Vice President - Business Development from June 1996 to August 1997. Prior to that, Mr. Manske was Vice President - Emerging Technologies from August 1993 to June 1996, and Director - Advanced Technologies Development from July 1989 to August 1993. KEVIN M. O'NEILL was elected Senior Vice President - Corporate Development and Marketing on November 16, 1998, and has served as Senior Vice President - Strategy, Business and Product Development since May 1998. From August 1997 to May 1998, Mr. O'Neill served as Senior Vice President - Business Development and Strategy, after serving as Senior Vice President - Global Marketing since June 1996. Mr. O'Neill had served as Vice President Global Marketing from 1995 until June 1996. From 1994 to 1995, Mr. O'Neill served as Vice President of Marketing, Strategic Resellers Group. Mr. O'Neill had previously served as Senior Director, Marketing and Product Development for Fujitsu - ICL Systems, Inc. GARY M. ROTH was elected Senior Vice President and General Manager - Magnetics Solutions on November 17, 1997 after serving as President - International Group since October 1995. Previously, Mr. Roth served as Vice President - Americas/Asia Division from November 1992 to September 1995. From October 1991 to October 1992, 14 he served as Manager - LAAP/Canada Operations. From October 1988 to October 1991, Mr. Roth served as Vice-President - Data Systems Division. EMERY SKARUPA was elected Senior Vice President - Manufacturing and Materials on August 13, 1997. Mr. Skarupa joined the Company in November 1993 as Director of Purchasing and was promoted to Vice President of Materials in May of 1996. Prior to joining Anacomp, Mr. Skarupa served as Director of Materials for Abex Aerospace, a division of Abex Corp., since January 1991. THOMAS L. BROWN was elected Vice President and Treasurer on May 19, 1996. From January 1995 to April 1996, Mr. Brown served as Corporate Controller of Hurco Companies, Inc. Mr. Brown had previously served as Assistant Vice President - Financial Reporting and Analysis for the Company from March 1991. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the NASDAQ National Market ("NASDAQ") under the symbol "ANCO." The following table sets forth the range of high and low closing prices for the Company's Common Stock for the periods indicated, as reported by NASDAQ:
Fiscal Year 1998 Fiscal Year 1997 ------------------------- ------------------------ High Low High Low ---------- ---------- ---------- ---------- First Quarter $16.25 $12.38 $ 9.50 $ 7.75 Second Quarter 17.75 14.63 12.38 8.25 Third Quarter 24.38 14.81 14.00 10.25 Fourth Quarter 23.38 12.00 16.13 11.25
The Company currently intends to retain all future earnings, if any, for the use in the operation and development of its business and, therefore, does not expect to declare or pay any cash dividends on the Company's capital stock. In addition, the Company's borrowing agreements prohibit the payment of cash dividends on the Company's capital stock. As of November 30, 1998, there were approximately 106 holders of record of the Company's Common Stock. The number of beneficial shareholders of record as of that date was approximately 1600. 15 ITEM 6. SELECTED FINANCIAL DATA The following Selected Financial Data of the Company should be read in conjunction with Item 1, "Business," set forth in Part I above and with the Company's Notes to the Consolidated Financial Statements (In thousands, except per share data):
Reorganized Company Predecessor Company --------------------------------------- -------------------------------------- Four Eight months months Year ended Year ended Ended Ended Year ended Year ended 9/30/98 9/30/97 9/30/96 5/31/96 9/30/95 9/30/94 ---------- ---------- ---------- ---------- ---------- ---------- Revenues ....................................... $ 499,017 $ 462,510 $ 151,542 $ 334,598 $ 591,189 $ 592,599 Income from operations before amortization of reorganization asset and restructuring charges .......................... 56,761 67,265 19,899 41,605 41,395 79,577 Income (loss) from operations .................. (27,359) (8,515) (5,764) 41,605 (128,189) 79,577 Income (loss) before reorganization items, income taxes, extraordinary items, and cumulative effect of accounting change ....................................... (60,135) (41,350) (17,609) 23,389 (203,326) 15,355 Income (loss) before, extraordinary items, and cumulative effect of accounting change ....................................... (66,635) (56,850) (22,009) 112,528 (238,326) 6,955 Net income (loss) .............................. (67,749)(a) (67,811)(a) (22,009)(a) 164,970(b) (238,326)(d) 14,955 Basic loss per share ........................... $ (4.85) $ (5.05) $ (2.19) (c) (c) (c)
As of September 30, -------------------------------------------------------------------------------------- Reorganized Company Predecessor Company ------------------------------------------------ ----------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- Current assets ............................ $ 145,695 $ 159,882 $ 147,530 $ 175,193 $ 214,129 Current liabilities ....................... 129,142 128,084 152,996 578,857 208,313 Working Capital ........................... 16,553 31,798 (5,466) (403,664) 5,816 Total assets .............................. 421,153 391,951 435,421 421,029 658,639 Long-term debt, less current portion ...... 338,884 247,889 217,044 --- 366,625 Stockholders' equity (deficit) ............ (47,492) 14,520 58,569 (188,243) 49,756
(a) The net loss for the fiscal years ended September 30, 1998 and1997 and the four months ended September 30, 1996, includes $75.6, $75.8 and $25.7 million of Reorganization Asset amortization, respectively. (b) The net income for the eight months ended May 31, 1996, includes $92.8 million of Reorganization items and an extraordinary item of $52.4 million as more fully discussed in Note 3 to the accompanying consolidated financial statements. (c) Due to the implementation of Fresh Start Reporting, per share data for the Predecessor Company has been excluded as they are not comparable. (d) The net loss for the year ended September 30, 1995, includes a $136.9 million charge related to the write-off of goodwill. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: general economic and business conditions; industry trends; industry capacity; competition; raw materials costs and availability; currency fluctuations; the loss of any significant customers; changes in business strategy or development plans; availability, terms and deployment of capital; availability of qualified personnel; changes in, or the failure or inability to comply with, government regulation; and other factors referenced in this report. These forward-looking statements speak only as of the date of this report. RESULTS OF OPERATIONS On June 18, 1998, the Company completed its acquisition of assets constituting substantially all of the business and operations of First Image Management Company("First Image"). For reporting purposes, the acquisition date was set as June 1, 1998. The First Image acquisition resulted in incremental revenues and EBITDA (defined on page 19) of $37.7 million and $9.7 million, respectively, for the period June 1, 1998 to September 30, 1998, and are included in the Company's results of operations for the fiscal year ended September 30, 1998. See Note 7 to the accompanying Consolidated Financial Statements for additional information related to this acquisition. On May 20, 1996, the Company's Reorganization Plan was confirmed by the United States Bankruptcy Court and on June 4, 1996, the Company emerged from bankruptcy reorganization. The Plan of Reorganization resulted in a reduction of approximately $174 million in principal and accrued interest on the Company's debt obligations and in liquidation amount and accrued dividends on its preferred stock. As a result of the Reorganization, the recording of the restructuring transaction and the implementation of Fresh Start Reporting, the Company's results of operations after May 31, 1996 (the cutoff date used for financial reporting purposes) are not comparable to results reported in prior periods. See Note 3 to the accompanying consolidated financial statements for information on the consummation of the Plan of Reorganization and implementation of Fresh Start Reporting. To facilitate a meaningful comparison of the Company's quarterly and year-to-date operating performance in fiscal years 1998, 1997 and 1996, the following discussion of consolidated results of operations is presented on a traditional comparative basis for all periods. Consequently, the information presented below for fiscal 1996 does not comply with accounting requirements for companies upon emergence from bankruptcy, which requirements call for separate reporting for the newly reorganized company and the predecessor company. 17 CONSOLIDATED RESULTS OF OPERATIONS ANACOMP, INC. AND SUBSIDIARIES
Year Ended September 30, ----------------------------------------------------- (dollars in thousands) 1998 1997 1996 (a) --------- --------- --------- Revenues: Services provided ........................................... $ 227,851 $ 186,590 $ 189,257 Equipment and supply sales .................................. 271,166 275,920 296,883 --------- --------- --------- 499,017 462,510 486,140 --------- --------- --------- Operating costs and expenses: Costs of services provided .................................. 134,000 97,932 104,499 Costs of equipment and supplies sold ........................ 198,627 206,582 226,623 Selling, general and administrative expenses ................ 97,335 87,355 87,217 Amortization of reorganization asset ........................ 75,626 75,780 25,663 Amortization of intangible assets ........................... 12,294 3,376 6,297 Restructuring charges ....................................... 8,494 ---- ---- --------- --------- --------- 526,376 471,025 450,299 --------- --------- --------- Income (loss) from operations .................................. (27,359) (8,515) 35,841 --------- --------- --------- Other income (expense): Interest income ............................................. 2,339 4,346 2,573 Interest expense and fee amortization ....................... (34,598) (35,896) (39,629) Other ....................................................... (517) (1,285) 6,995 --------- --------- --------- (32,776) (32,835) (30,061) --------- --------- --------- Income (loss) before reorganization items, income taxes and extraordinary items ........................................... (60,135) (41,350) 5,780 Reorganization items ............................................ ---- ---- 92,839 --------- --------- --------- Income (loss) before income taxes and extraordinary items ....... (60,135) (41,350) 98,619 Provision for income taxes ...................................... 6,500 15,500 8,100 --------- --------- --------- Income (loss) before extraordinary items ........................ (66,635) (56,850) 90,519 Extraordinary items ............................................. (1,114) (10,961) 52,442 --------- --------- --------- Net income (loss) ............................................... (67,749) (67,811) 142,961 Preferred stock dividends and discount accretion ................ ---- ---- 540 --------- --------- --------- Net income (loss) available to common stockholders .............. $ (67,749) $ (67,811) $ 142,421 --------- --------- --------- --------- --------- --------- Supplemental: EBITDA (b) ...................................................... $ 84,843 $ 83,662 $ 84,175 --------- --------- --------- --------- --------- ---------
(a) This column reflects the combination of historical results for the eight months ended May 31, 1996, for the Predecessor Company and for the four months ended September 30, 1996, for the Reorganized Company. (b) See the definition of EBITDA on Page 19. 18 GENERAL Anacomp reported a net loss of $67.7 million for the year ended September 30, 1998 as compared to a net loss of $67.8 million and net income of $143.0 million for the years ended September 30, 1997 and 1996, respectively. The fiscal 1998 net loss includes non-cash amortization of the Company's reorganization asset of $75.6 million and an extraordinary loss of $1.1 million net of income taxes, on the extinguishment of debt comprised of unamortized debt issue costs on the Company's senior secured loan. Included in the fiscal 1997 net loss is non-cash amortization of the Company's reorganization asset of $75.8 million and an extraordinary loss of $11.0 million net of income taxes on the extinguishment of debt comprised of a 3% call premium and unamortized discount on the Company's existing 13% subordinated notes. Net income for fiscal 1996 includes $25.7 million in non-cash amortization of the Company's reorganization asset, a gain of $92.8 million for reorganization items and an extraordinary gain resulting from the discharge of indebtedness of $52.4 million. Pursuant to a 1990 OEM agreement Eastman Kodak Company ("Kodak") was obligated to purchase an additional 151 XFP 2000 systems by October 1997 or pay a cash penalty to the Company. The Company and Kodak negotiated an amendment to the OEM agreement, whereby the Company accepted a $3.6 million cash payment from Kodak, which is included in the results for fiscal 1997, a commitment to purchase an additional 28 XFP 2000 systems and a one-time purchase of spare parts. Kodak purchased 16 XFP 2000 systems in fiscal 1997 and 12 in fiscal 1998 thereby fulfilling their obligation under the amended agreement. Earnings before interest, other income, reorganization items, special and restructuring charges, taxes, depreciation and amortization and extraordinary items ("EBITDA") was $84.8 million, or 17.0% of revenues for the year ended September 30, 1998. This compares to EBITDA of $83.7 million, or 18.1% of revenues, and $84.2 million, or 17.3% of revenues for the years ended September 30, 1997 and 1996, respectively. Excluding the Kodak payment of $3.6 million described above, EBITDA for fiscal 1997 was $80.1 million or 17.3% of revenues. FISCAL YEAR ENDED SEPTEMBER 30, 1998 VS. FISCAL YEAR ENDED SEPTEMBER 30, 1997 REVENUES. The Company's revenues increased 7.9% from $462.5 million in fiscal 1997 to $499.0 million in fiscal 1998. The Company experienced increased revenues of $49.2 million and $11.5 million in its Outsource Services and Output Systems business lines, respectively, while experiencing decreasing revenues of $20.2 million in its Micrographic Supplies product lines. The $49.2 million increase in Outsource Service revenues was primarily due to the acquisition of First Image and the inclusion of its operating results for the four months ending September 30, 1998 ($37.7 million). Additionally, excluding the results of the First Image, COM service volumes increased by approximately 23% while average selling prices decreased by approximately 12%. Certain data center acquisitions in Europe and several large customer gains contributed to both the increase in volumes and the decrease in average selling prices. The $11.5 million increase in Output Systems revenues was primarily due to a $6.8 million increase in COM systems sales which was the result of both an increase in the number of units sold as well as the pricing of new and used systems. The Company sold or leased 140 XFP 2000 units in fiscal 1998 compared to 135 in fiscal 1997. Digital systems revenues increased by $4.7 million which was primarily the result of the Com-Informatic acquisition that was consummated in October 1997. The $20.2 million decrease in Micrographics Supplies revenues was the result of the Company's discontinuance of the sale of duplicate film to the reseller market, as well as declining sales of original COM film and duplicate film, which is consistent with long-term trends. GROSS MARGIN. The Company's gross margins increased 7.4% from $154.4 million (33.6% of revenues) in fiscal 1997 to $166.4 million (33.3% of revenues) in fiscal 1998 (excluding the Kodak payment in fiscal 1997). Gross margins as a percentage of revenues remained relatively flat on a consolidated basis although there were fluctuations within certain business lines. Gross margins generated by Outsource Services decreased as a percent of revenue by 3.4% which was primarily the result of decreases in COM services average selling prices. The decrease in average selling prices was in part due to the large customer gains which received favorable pricing due to their large volumes and acquisitions which increased sales volume at lower average 19 selling prices. Gross margins generated by COM systems sales as a percent of revenue increased by approximately 5.3% which was primarily due to product mix and the result of manufacturing efficiencies realized during fiscal 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses increased 11.4% from $87.4 million (18.9% of revenues) in fiscal 1997 to $97.3 million (19.5% of revenues) in fiscal 1998. This increase is primarily due to the increased expenses associated with the First Image and Com-Informatic acquisitions. Additionally, the Company increased its sales efforts, sales support and product development for the digital systems products. The Company experienced lower SG&A expenses as a percentage of revenues (18.1% of revenues) during the fourth quarter of fiscal 1998. This decrease in SG&A was the result of additional revenues from First Image along with the benefit from sales force reductions which occurred in the third quarter. AMORTIZATION OF INTANGIBLE ASSETS . Amortization of intangible assets increased 264.0% from $3.4 million (1.0% of revenues) in fiscal 1997 to $12.3 million (2.5% of revenues) in fiscal 1998. This increase is primarily due to the amortization of goodwill associated with the First Image acquisition. RESTRUCTURING CHARGES. Restructuring charges totaled $8.5 million (1.7% of revenues) in fiscal 1998. These charges resulted from the Company's acquisition of First Image as the Company plans to close down Anacomp sites with multiple market presence in certain cities and convert First Image customers to Anacomp equipment. These restructuring activities are expected to be completed during fiscal year 1999. The restructuring charges consist of personnel related costs of $2.7 million, facility closedown costs of $4.8 million, and other costs of $1.0 million. The Company incurred $1.1 million of personnel costs primarily related to severance expenditures and $0.4 million of other administrative costs during the year ended September 30, 1998. INTEREST EXPENSE. Interest expense decreased 6.9% from $35.9 million in fiscal 1997 to $34.6 million in fiscal 1998. This decrease was the result of the Company refinancing substantially all of its debt obligations at lower interest rates during fiscal 1998 and 1997 which was partially offset by additional borrowings used to finance the acquisition of First Image. The Company is currently anticipating that interest expense will increase to levels similar to that which was experienced in the fourth quarter of fiscal 1998. Interest expense increased $2.3 million from $7.9 million in the fourth quarter of fiscal 1997 to $10.2 million in the fourth quarter of fiscal 1998. PROVISION FOR INCOME TAXES. The provision for income taxes in fiscal 1998 includes $5.0 million on earnings of Anacomp's foreign subsidiaries and $0.8 million of domestic taxes after considering the impact of the extraordinary loss. Of the $0.8 million domestic tax provision, approximately $0.4 million is currently payable. The Company's effective tax rate decreased by approximately 3% from 45% of taxable income in fiscal 1997 to 42% of taxable income in 1998. This decrease was primarily due to a substantial portion of the taxable income being generated in countries with lower income tax rates relative to the prior period. See Note 17 to the accompanying Consolidated Financial Statements for further discussion. FISCAL YEAR ENDED SEPTEMBER 30, 1997 VS. FISCAL YEAR ENDED SEPTEMBER 30, 1996 REVENUES. The Company's revenues decreased 4.9% from $486.1 million in fiscal 1996 to $462.5 million in fiscal 1997. The Company experienced decreased revenues of $18.8 million and $9.4 million in its Micrographic Supplies and Magnetic Media business lines, respectively, which was offset by increased revenues of $7.2 million in its Output Systems product lines. The $18.8 million decrease in Micrographic Supplies revenues includes a decrease of $8.3 million related to the discontinuance and downsizing of selected product lines initiated in fiscal 1996. The remaining decrease was consistent with the projected market trends for reader and reader/printers, original COM film, duplicate film and other accessories. The Magnetic Media revenues decreased by $9.4 million due to expected declining sales in several major product categories including 3480 tape cartridges ($5.9 million), open reel tape ($7.7 million) and TK 50/52 tape ($2.0 million). These decreases were partially offset by new contributions of $5.8 million from metal particle tape products. 20 The $7.2 million increase in Output Systems revenues is primarily attributable to digital systems sales. Digital systems sales increased by $9.3 million which was primarily the result of the revenue contribution from the DataWare acquisition that was consummated in January 1997. Prior to that acquisition, there were no digital system sales. These sales were offset by a $2.1 million decrease in COM systems revenues. This reduction resulted from an increase in 1997 in the number of COM system units shipped under operating lease arrangements, and a decrease in the number of systems shipped under straight sales arrangements along with a change in the mix and pricing of new and used systems GROSS MARGIN. The Company's gross margins increased by less than 2% as a percentage of revenues from $155.0 million (31.9% of revenues) in fiscal 1996 to $154.4 million (33.6% of revenues) in fiscal 1997 (the fiscal 1997 margin excludes the Kodak payment). Gross margins remained relatively flat on a consolidated basis although there were fluctuations within certain business lines. Gross margins generated by Outsource Services decreased as a percent of revenue by approximately 3% which was primarily the result of a decrease in COM services average selling prices. Data center acquisitions and several large customer gains resulted in increased volumes with a corresponding decrease in average selling prices. Gross margins generated by Technical Services as a percent of revenue increased by approximately 7% which was primarily due to cost reduction efforts in maintenance services initiated by new management. Output Systems gross margins as a percentage of revenues increased by approximately 12% due to a change in product mix with a greater portion of sales represented by refurbished systems which have higher margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased less than 1% from $87.2 million (17.9% of revenues) in fiscal 1996 to $87.4 million (18.9% of revenues) in fiscal 1997. This increase was primarily the result of transition costs associated with the Company's fiscal 1997 acquisition activity. INTEREST EXPENSE. Interest expense decreased 7.8% from $39.6 million in fiscal 1996 to $35.9 million in fiscal 1997. This decrease was primarily due to the Company's refinancing efforts in fiscal 1997 and its improved debt structure as a result of the Company's reorganization in fiscal 1996. PROVISION FOR INCOME TAXES. The provision for income taxes in fiscal 1997 includes $5.4 million on earnings from Anacomp's foreign subsidiaries and $4.2 million of domestic taxes after considering the impact of the extraordinary loss. Of the $4.2 million domestic tax provision, approximately $0.7 million is currently payable. See Note 17 to the accompanying Consolidated Financial Statements for further discussion. LIQUIDITY AND CAPITAL RESOURCES During the period ended September 30, 1998, Anacomp issued $135 million of 10 7/8% Senior Subordinated Notes which proceeds were used to fund the First Image acquisition. As of September 30, 1998 the Company had $335 million of 10 7/8% Senior Subordinated Notes outstanding. Interest on these notes is payable semi-annually and the notes are due in April, 2004. Anacomp's working capital at September 30, 1998, excluding the current portion of long-term debt, was $17.7 million, compared to $41.4 million at September 30, 1997. Net cash provided by operating activities decreased to $24.6 million for the fiscal year ended September 30, 1998, compared to $57.8 million in the comparable prior period. Fiscal 1997 benefited from $12 million in non-cash interest expense and significant reductions in long-term lease receivables and inventory. Fiscal 1998 did not include the same benefits and, in addition, current liabilities were significantly reduced during the year. Net cash used in investing activities was $143.4 million in the current period, compared to $32.8 million in the comparable prior period. This change was primarily the result of the First Image acquisition in the current period. Net cash provided by financing activities increased to $79.6 million for the fiscal year ended September 30, 1998, compared to a net use of $5.1 million in the comparable prior period. This change was primarily the result of the Company's issuance of $135 million of 10 7/8% Senior Subordinated notes during the current period which was offset by the pay off of senior indebtedness outstanding at the end of fiscal 1997. 21 The Company's cash balance (including restricted cash) as of September 30, 1998 was $22.0 million, compared to $65.5 million at September 30, 1997. The Company also has available an $80 million revolving credit facility. There were no amounts outstanding under the revolving credit facility as of September 30, 1998. The Company has significant debt service obligations. The ability of the Company to meet its debt service and other obligations will depend upon its future performance and is subject to financial, economic and other factors, some of which are beyond its control. However, the Company believes that cash on hand and cash generated from operations and cash available under the revolving credit facility will be sufficient to fund its debt service requirements, acquisition strategies and working capital requirements in the foreseeable future. YEAR 2000 Anacomp has undertaken a comprehensive "year 2000" program for the products that it sells or distributes in the marketplace. Under this program, the Company has assessed all of its critical software and hardware products to determine what remediation, if any, is necessary for the proper functioning of these systems in the year 2000 and beyond. The Company has worked with its outside vendors to ensure that they will continue to support the products that the vendors supply to Anacomp for resale, including the performance by the vendors of any required year 2000 remediation. Anacomp has also analyzed and updated for year 2000 purposes certain software and hardware systems that it uses internally. The Company continues to consider year 2000 issues for all new products and services as well as those in development or included in business acquisitions. STATE OF READINESS Anacomp's overall state of readiness can be assessed by describing its specific readiness in four key areas, namely its products and services, its vendors' and suppliers' products and services, its internal systems, and its products in development. Anacomp has completed the assessment, remediation and year 2000 testing phases of nearly all supported products and services, including those responsible for generating the material portion of its revenues. The Company is currently in the remediation phase of its electronic data transmission project. Anacomp summarizes the status of each completed product or service in a written report to the Company's year 2000 steering committee, for archiving in the Company's year 2000 database. These processes have been reviewed and approved by a third party consultant retained for this purpose. The implementation phase of the Company's year 2000 project depends on the response of the Company's customers who may require upgrades or migration paths. Anacomp is in the process of communicating with identified customers and has no reason to believe that all customers who require upgrades or migration will not receive them. To this end, Anacomp has offered financial incentives to encourage early responses and avoid peak demand loads, although no assurance can be made that the demand will be spread sufficiently to eliminate delays in implementation. Anacomp has also launched its "Analog as a Fail Safe" campaign to educate customers about the value of COM and microfilm as a way to minimize the risk of the year 2000. Although customers may divert expenditures away from these products and services in order to fund other year 2000 remediation, Anacomp encourages customers to consider these products and services as a cost-effective backup to digital storage because retrieval of data stored on microfilm does not require digital technology. The Company has requested that approximately 1,000 of its vendors and suppliers answer a year 2000 readiness questionnaire and has sent a follow-up letter and questionnaire to each of approximately 200 key vendors and suppliers who did not reply to the first mailing. Anacomp is in the process of reviewing the responses for their likely impact on the Company. For those Anacomp products which incorporate the products of a third party supplier, Anacomp requests that its suppliers disclose test procedures and results. Anacomp has also requested that its vendors in the human resources area, such as its retirement, health and insurance providers, respond in writing as to their readiness, but there can be no assurance that such vendors will either respond or achieve readiness in a timely fashion. 22 Anacomp has identified all internal software and hardware products used in its corporate headquarters in Poway, California, including those used to assimilate and report financial information and to handle billing, collections and electronic commerce. In those instances where remediation or renovation was required, Anacomp has either completed or has nearly completed such remediation or renovation. Anacomp is in the process of completing the documentation of such efforts for its year 2000 archives. The Company continues to develop new products and services and acquire new businesses. Anacomp develops and tests each new product, sometimes with the assistance of an outside consultant, for year 2000 readiness. Businesses which Anacomp acquires, such as First Image, are subject to the same assessment, remediation, testing and implementation phases as those described above. COSTS Anacomp estimates that total expenditures on its year 2000 project, including costs of outside parties such as consultants and attorneys, costs of hardware and software remediation, internal labor, travel and out of pocket expenses to be approximately $0.3, $2.3, and $1.2 million in fiscal year 1997, 1998, and 1999, respectively. These figures include estimates from the engineering, manufacturing, legal and information technology departments of the Company. RISKS There can be no assurance that the Company and its vendors and suppliers will be able to identify all year 2000 issues before problems manifest themselves or to complete all remediation in the required time frame. Further, it is possible that the future level of expenses in the Company's remediation efforts could rise significantly. The Company relies upon the continuous provision of services from third parties such as electrical and telecommunication utilities around the world, and the Company plans to enhance its electronic data transmission capabilities. Any sustained disruption of service or capability could adversely impact the Company's ability to operate its business. Finally, there can be no assurance that, if left unremedied, the products or services that the Company sells or distributes would remain competitive in the marketplace or the products that the Company uses internally would not have a material effect upon the ability of the Company to report its financial results. CONTINGENCY PLANS In those instances where the Company determines that year 2000 problems with its operational facilities may not be identified or remediated in time, the Company believes that its business will still be able to function without substantial interruption. For example, COM services provided in a data center which experiences a loss of power due to a third party utility's failure to identify or remediate an isolated year 2000 problem could be shifted to another data center without substantial interruption. In addition, electronic transmission of data could be replaced with manual delivery of data upon completion of certain modifications. In those instances where an installed COM customer experiences a year 2000 problem while operating its own COM equipment, Anacomp could offer its COM services to the customer at one of its data centers upon completion of certain modifications. This seamless nature of many of Anacomp's products and services forms the basis of Anacomp's ongoing contingency planning. ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued two additional pronouncements related to reporting comprehensive income and disclosure of segment information. These two pronouncements are effective for fiscal years beginning after December 15, 1997. The Company has not yet determined the additional disclosures specified by these pronouncements on the consolidated financial statements for the year ended September 30, 1998, which will be reported during fiscal 1999. 23 EURO CURRENCY Many of the countries in which the Company sells its products and services are Member States of the Economic and Monetary Union ("EMU"). Beginning January 1, 1999, Member States of the EMU may begin trading in either their local currencies or the euro, the official currency of EMU participating Member States. Parties are free to choose the unit they prefer in contractual relationships during the transitional period, beginning January 1999 and ending June 2002. The Company's computer system contains the functionality to process transactions in either a country's local currency or the euro. The Company does not currently anticipate any material adverse effects on its operations related to the EMU's conversion to the euro. However, there can be no assurance that the conversion of EMU Member States to euro will not have a material adverse effect on the Company and its operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company does not have any significant financial instruments other than fixed rate debt. The Company's bank line of credit is affected by the general level of U.S. interest rates and/or Libor. However, the Company had no amounts outstanding under its bank line of credit on September 30, 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary financial information appear on pages A-1 to A-27 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes in or disagreements with accountants on accounting and financial disclosures. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company hereby incorporates by reference the information contained under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" from its definitive Proxy Statement (hereinafter, the "Proxy Statement") to be delivered to the shareholders of the Company in connection with the 1999 Annual Meeting of Shareholders to be held February 8, 1999. Certain information relating to executive officers of the Company appears on pages 13 through 15 hereof. ITEM 11. EXECUTIVE COMPENSATION The Company hereby incorporates by reference into this Item the information contained under the heading "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company hereby incorporates by reference into this Item the information contained under the heading "Security Ownership of Management and Other Beneficial Owners" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Hasso Jenss, a Senior Vice President of the Company, borrowed $115,600 from the Company on August 12, 1998 in connection with his relocation from Germany to the Poway, California area and his purchase of a residence. The indebtedness was evidenced by a promissory note dated that same date which bears interest at 7.5% per annum with a stated maturity date of November 30, 1998 (subject to extension). On December 16, 1998, Mr. Jenss repaid to the Company the entire principal amount of the promissory note (which was then cancelled), and he repaid all accrued interest on December 18, 1998. 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. The following financial statements and other information appear in Appendix A to this Annual Report on Form 10-K and are filed as a part hereof: Report of Independent Public Accountants. Consolidated Balance Sheets - September 30, 1998 and 1997. Consolidated Statements of Operations - Years Ended September 30, 1998 and 1997, the Four Months Ended September 30, 1996, and the Eight Months Ended May 31, 1996. Consolidated Statements of Cash Flows - Years Ended September 30, 1998 and 1997, the Four Months Ended September 30, 1996 and the Eight Months Ended May 31, 1996. Consolidated Statements of Stockholders' Equity (Deficit) - Years Ended September 30, 1998 and 1997, the Four Months Ended September 30, 1996 and the Eight Months Ended May 31, 1996. Notes to the Consolidated Financial Statements. 2. Financial Statement Schedules are not filed with this Annual Report on Form 10-K because the Schedules are either inapplicable or the required information is presented in the financial statements listed immediately above or in the notes thereto. (b) Reports on Form 8-K: During the quarter ended September 30, 1998, and prior to filing this Annual Report on Form 10-K, Anacomp filed one report on Form 8-K, dated August 12, 1998 (the "Form 8-K Amendment"). The Form 8-K Amendment was filed to amend the June 18, 1998 Form 8-K that the Company had previously filed reporting that the Company had entered into an Asset Purchase Agreement with First Financial Management Company and First Data Corporation to acquire First Image. The Form 8-K Amendment was filed to include the audited financial statements of First Image for the three years ended December 31, 1997. (c) The following exhibits are filed with this Annual Report on Form 10-K or incorporated herein by reference to the listed document previously filed with the Securities and Exchange Commission (the "SEC"). Previously unfiled documents are noted with an asterisk (*): 2.1 Third Amended Joint Plan of Reorganization of the Company and certain of its subsidiaries. (1) 2.2 Asset Purchase Agreement, dated as of May 5, 1998, among the Company, First Financial Management Corporation and First Data Corporation. (2) 2.3 Amendment No. 1, dated as of June 18, 1998, to Asset Purchase Agreement, dated as of May 5, 1998, among the Company, First Financial Management Corporation and First Data Corporation. (3) 3.1 Amended and Restated Articles of Incorporation of the Company. (4) 3.2 Amended and Restated Bylaws of the Company. (4) 4.1 Form of Common Stock Certificate. (4) 4.2 Warrant Agreement, dated as of June 4, 1996, between the Company and ChaseMellon Shareholder Services, L.L.C. (2) 26 4.3 Form of Warrant Certificate. (4) 4.4 Indenture, dated as of March 24, 1997, between the Company and IBJ Schroder Bank & Trust Company, as trustee, relating to the Company's 10-7/8% Senior Subordinated Notes due 2004, Series B. (5) 4.5 First Supplemental Indenture, date as of June 12, 1998, to the Indenture, dated as of March 24, 1997, between the Company, as issuer, and IBJ Schroder Bank & Trust Company, as trustee relating to the 10-7/8% Senior Subordinated Notes due 2004, Series A and the 10-7/8% Senior Subordinated Notes due 2004, Series B (containing, as exhibits, specimens of such Series A Notes and Series B Notes ). (2) 4.6 Indenture, dated as of June 18, 1998, between the Company and IBJ Schroder Bank & Trust Company, as trustee, relating to the Company's 10-7/8% Series C Senior Subordinated Notes due 2004 and 10 7/8% Series D Senior Subordinated Notes due 2004. (2) 4.7 Purchase Agreement, dated June 12, 1998, between the Company and NatWest Capital Markets Limited, relating to the Company's 10-7/8% Series Senior C Subordinated Notes due 2004. (2) 4.8 Exchange and Registration Rights Agreement, dated June 18, 1998, between the Company and NatWest Capital Markets Limited, relating to the Company's 10-7/8% Series C Senior Subordinated Notes due 2004 and 10-7/8% Series D Senior Subordinated Notes due 2004. (2) 4.9 Form Letter of Transmittal, relating to the Company's 10-7/8% Series C Senior Subordinated Notes due 2004 and Series D Senior Subordinated Notes due 2004. (3) 10.1 Employment Agreement, effective October 1, 1997, between the Company and Ralph W. Koehrer. (6) 10.2 Employment Agreement, effective January 5, 1998, between the Company and Frederick F. Geyer. (3) 10.3 Employment Agreement, effective October 1, 1992, between the Company and William C. Ater. (8) 10.4 Employment Agreement, effective October 1, 1994, between the Company and Dr. Peter Williams.* 10.5 Revolving Credit Agreement, dated as of June 15, 1998, among Anacomp, Inc., the various lending institutions named therein and BankBoston, N.A. as agent. (2) 10.6 Common Stock Registration Rights Agreement, dated as of June 4, 1996, by and among the Company and the Holders of Registrable Shares. (4) 10.7 Amended and Restated Master Supply Agreement, dated October 8, 1993, by and among the Company, SKC America, Inc. and SKC Limited. (7) 10.8 First Cumulative Amendment to the Amended and Restated Master Supply Agreement, dated May 17, 1996, by and among the Company, SKC America, Inc. and SKC Limited. (9) 21.1 Subsidiaries. * 23.1 Consent of Arthur Andersen LLP. * 27.1 Financial data schedule (required for electronic filing only). * - --------------------- (1) Incorporated by reference to the Company's Form 8-A filed with the SEC on May 15, 1996 (File No. 0-7641). (2) Incorporated by reference to the Company's Form 8-K filed with the SEC on June 24, 1998 (File No. 1-8328). 27 (3) Incorporated by reference to the Company's Form S-4 Registration Statement filed with SEC on August 17, 1998 (File No. 333-61675). (4) Incorporated by reference to the Company's Form 8-K filed with the SEC on June 19, 1996 (File No. 1-8328). (5) Incorporated by reference to the Company's Form S-4 Registration Statement filed with the SEC on April 16, 1997 (File No. 333-25281). (6) Incorporated by reference to the Company's Form 10-Q for the quarterly period ended December 31, 1997. (7) Incorporated by reference to the Company's Form 10-K for the year ended September 30, 1993. (8) Incorporated by reference to the Company's Form 10-K for the year ended September 30, 1996. (9) Incorporated by reference to the Company's Pre-Effective Amendment No. 1 to Form S-1 Registration Statement filed with the SEC on September 19, 1996 (File No. 333-9395). 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANACOMP, INC. By: /s/ Ralph W. Koehrer -------------------------------------------- Ralph W. Koehrer President, Chief Executive Officer and Director Dated: December 22, 1998 Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Dated: December 22, 1998 By: /s/ Ralph W. Koehrer -------------------------------------------- Ralph W. Koehrer President, Chief Executive Officer and Director Dated: December 22, 1998 By: /s/ Donald L. Viles -------------------------------------------- Donald L. Viles, Executive Vice President and Chief Financial Officer Dated: December 22, 1998 By: /s/ Richard D. Jackson -------------------------------------------- Richard D. Jackson, Co-Chairman of the Board Dated: December 22, 1998 By: /s/ Lewis Solomon -------------------------------------------- Lewis Solomon, Co-Chairman of the Board Dated: December 22, 1998 By: /s/ Talton R. Embry -------------------------------------------- Talton R. Embry, Director Dated: December 22, 1998 By: /s/ Darius W. Gaskins, Jr. -------------------------------------------- Darius W. Gaskins, Jr., Director Dated: December 22, 1998 By: /s/ Jay P. Gilbertson -------------------------------------------- Jay P. Gilbertson, Director Dated: December 22, 1998 By: /s/ George A. Poole, Jr. -------------------------------------------- George A. Poole, Jr., Director 29 APPENDIX A ANNUAL REPORT ON FORM 10-K ANACOMP, INC.
PAGE ---- Report of Independent Public Accountants..............................................................A - 2 Consolidated Balance Sheets -- September 30, 1998 and 1997............................................A - 3 Consolidated Statements of Operations - Years Ended September 30, 1998 and 1997, Four Months Ended September 30, 1996, Eight Months Ended May 31, 1996...............................A - 4 Consolidated Statements of Cash Flows -- Years Ended September 30, 1998 and 1997, Four Months Ended September 30, 1996, Eight Months Ended May 31, 1996....................................A - 5 Consolidated Statements of Stockholders' Equity (deficit) -- Years Ended September 30, 1998 and 1997, Four Months Ended September 30, 1996 and Eight Months Ended May 31, 1996, ................A - 7 Notes to the Consolidated Financial Statements........................................................A - 8
A-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Anacomp, Inc.: We have audited the accompanying consolidated balance sheets of Anacomp, Inc. (an Indiana corporation) and subsidiaries as of September 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years ended September 30, 1998 and 1997, the four months ended September 30, 1996 and the eight months ended May 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As more fully described in Note 2 to the consolidated financial statements, effective June 4, 1996, the Company emerged from protection under Chapter 11 of the U.S. Bankruptcy Code pursuant to a Reorganization Plan which was confirmed by the Bankruptcy Court on May 20, 1996. In accordance with AICPA Statement of Position 90-7, the Company adopted "Fresh Start Reporting" whereby its assets, liabilities and new capital structure were adjusted to reflect estimated fair values as of May 31, 1996. As a result, the consolidated financial statements for the periods subsequent to May 31, 1996 reflect the Successor Company's new basis of accounting and are not comparable to the Predecessor Company's pre-reorganization consolidated financial statements. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Anacomp, Inc. and subsidiaries as of September 30, 1998 and 1997, and the results of their operations and their cash flows for the years ended September 30, 1998 and 1997, the four months ended September 30, 1996, and the eight months ended May 31, 1996 in conformity with generally accepted accounting principles. Arthur Andersen LLP Indianapolis, Indiana, November 20, 1998. A-2 CONSOLIDATED BALANCE SHEETS Anacomp, Inc. and Subsidiaries
September 30, ---------------------------------- 1998 1997 (dollars in thousands, except per share amounts) --------- --------- ASSETS Current assets: Cash and cash equivalents ................................................... $ 17,721 $ 58,060 Restricted cash ............................................................. 4,285 7,433 Accounts and notes receivable, net .......................................... 79,109 58,628 Current portion of long-term receivables, net ............................... 5,641 3,647 Inventories ................................................................. 28,618 25,261 Prepaid expenses and other .................................................. 10,321 6,853 --------- --------- Total current assets ............................................................ 145,695 159,882 Property and equipment, net ..................................................... 41,749 29,063 Long-term receivables, net of current portion ................................... 9,002 6,587 Excess of purchase price over net assets of businesses acquired and other intangibles, net .................................................. 120,814 17,800 Reorganization value in excess of identifiable assets, net ...................... 88,230 163,856 Other assets .................................................................... 15,663 14,763 --------- --------- $ 421,153 $ 391,951 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt ........................................... $ 1,152 $ 9,595 Accounts payable ............................................................ 36,464 39,270 Accrued compensation, benefits and withholdings ............................. 18,372 16,481 Accrued income taxes ........................................................ 15,197 13,471 Accrued interest ............................................................ 18,158 14,738 Other accrued liabilities ................................................... 39,799 34,529 --------- --------- Total current liabilities ....................................................... 129,142 128,084 --------- --------- --------- --------- Non current liabilities: Long-term debt, net of current portion ...................................... 338,884 247,889 Other noncurrent liabilities ................................................ 619 1,458 --------- --------- Total noncurrent liabilities .................................................... 339,503 249,347 --------- --------- Commitments and contingencies (See Note 18) Stockholders' equity (deficit): Preferred stock, 1,000,000 shares authorized, none issued ................... --- --- Common Stock, $.01 par value; 20,000,000 shares authorized; 14,263,569 and 13,789,764 issued and outstanding, respectively 143 138 Capital in excess of par value .............................................. 109,486 105,329 Cumulative translation adjustment (from May 31, 1996) ....................... 447 (1,128) Accumulated deficit (from May 31, 1996) ..................................... (157,568) (89,819) --------- --------- Total stockholders' equity (deficit) ............................................ (47,492) 14,520 --------- --------- $ 421,153 $ 391,951 --------- --------- --------- ---------
See notes to the consolidated financial statements. A-3 CONSOLIDATED STATEMENTS OF OPERATIONS Anacomp, Inc. and Subsidiaries
Predecessor Reorganized Company Company ----------------------------------------------------- Four Eight Year Ended Year Ended Months Ended Months Ended September 30, September 30, September 30, May 31, (in thousands, except per share amounts) 1998 1997 1996 1996 ----------------------------------------------------- Revenues: Services provided .................................................. $ 227,851 $ 186,590 $ 59,055 $ 130,202 Equipment and supply sales ......................................... 271,166 275,920 92,487 204,396 --------- --------- --------- --------- 499,017 462,510 151,542 334,598 --------- --------- --------- --------- Operating costs and expenses: Costs of services provided ......................................... 134,000 97,932 31,858 72,641 Costs of equipment and supplies sold ............................... 198,627 206,582 70,097 156,526 Selling, general and administrative expenses ....................... 97,335 87,355 29,482 57,735 Amortization of reorganization asset ............................... 75,626 75,780 25,663 --- Amortization of intangible assets .................................. 12,294 3,376 206 6,091 Restructuring charges .............................................. 8,494 --- --- --- --------- --------- --------- --------- 526,376 471,025 157,306 292,993 --------- --------- --------- --------- Income (loss) from operations .......................................... (27,359) (8,515) (5,764) 41,605 --------- --------- --------- --------- Other income (expense): Interest income .................................................... 2,339 4,346 997 1,576 Interest expense and fee amortization .............................. (34,598) (35,896) (12,869) (26,760) Other .............................................................. (517) (1,285) 27 6,968 --------- --------- --------- --------- (32,776) (32,835) (11,845) (18,216) --------- --------- --------- --------- Income (loss) before reorganization items, income taxes and extraordinary items .................................................. (60,135) (41,350) (17,609) 23,389 Reorganization items ................................................... --- --- --- 92,839 --------- --------- --------- --------- Income (loss) before income taxes and extraordinary items .............. (60,135) (41,350) (17,609) 116,228 Provision for income taxes ............................................. 6,500 15,500 4,400 3,700 --------- --------- --------- --------- Income (loss) before extraordinary items ............................... (66,635) (56,850) (22,009) 112,528 Extraordinary items: Gain on discharge of indebtedness, net of income taxes ............ --- --- --- 52,442 Loss on extinguishment of debt, net of income tax benefits ......... (1,114) (10,961) --- --- --------- --------- --------- --------- Net income (loss) ...................................................... (67,749) (67,811) (22,009) 164,970 Preferred stock dividends and discount accretion ....................... --- --- --- 540 Net income (loss) available to common stockholders ..................... $ (67,749) $ (67,811) $ (22,009) $ 164,430 --------- --------- --------- --------- --------- --------- --------- --------- Basic net loss per share before extraordinary items .................... $ (4.77) $ (4.23) $ (2.19) Extraordinary loss on extinguishment of debt ........................... (0.08) (0.82) --- --------- --------- --------- Basic net loss per share ............................................... $ (4.85) $ (5.05) $ (2.19) --------- --------- --------- --------- --------- --------- Shares used in computing basic net loss per share ...................... 13,963 13,432 10,034 --------- --------- --------- --------- --------- ---------
A-4 See notes to the consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Anacomp, Inc. and Subsidiaries
Predecessor Reorganized Company Company --------------------------------------------------- Four Eight Year Ended Year Ended Months Ended Months Ended September 30, September 30,September 30, May 31, (dollars in thousands) 1998 1997 1996 1996 --------------------------------------------------- Cash flows from operating activities: Net income (loss) ........................................................... $ (67,749) $ (67,811) $(22,009) $ 164,970 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary items ....................................................... 1,114 10,961 --- (52,442) Non-cash reorganization items ............................................. --- --- --- (107,352) Depreciation and amortization ............................................. 104,516 93,552 30,635 18,788 Non-cash compensation ..................................................... 1,004 1,012 975 --- Provision (benefit) for losses on accounts receivable ..................... 277 (341) 482 110 Non-cash charge in lieu of taxes .......................................... --- 700 1,300 --- Gain on sale of ICS Division .............................................. --- --- --- (6,202) Other ..................................................................... --- 6,278 (175) 997 Restricted cash requirements .................................................. 3,147 2,164 (2,755) (6,842) Change in assets and liabilities net of effects from acquisitions: Decrease in accounts and long-term receivables .......................... 1,368 6,687 5,637 24,624 Decrease (increase) in inventories and prepaid expenses ................. (269) 7,118 10,416 11,174 Decrease (increase) in other assets ..................................... (1,948) (953) 1 1,094 Increase (decrease) in accounts payable and accrued expenses ............ (15,839) 4,970 (17,283) (5,077) Increase (decrease) in other noncurrent liabilities ..................... (982) (6,495) 4,671 (5,899) --------- --------- -------- --------- Net cash provided by operating activities .............................. 24,639 57,842 11,895 37,943 --------- --------- -------- --------- Cash flows from investing activities: Proceeds from sale of ICS Division .......................................... --- --- --- 13,554 Purchases of property, plant and equipment .................................. (12,469) (10,399) (2,224) (3,599) Payments to acquire companies and customer rights, net of the proceeds from the sale of DAS and DPDS business lines in 1998 ............. (130,936) (22,443) (3,844) --- --------- --------- -------- --------- Net cash provided by (used in) investing activities .................... (143,405) (32,842) (6,068) 9,955 --------- --------- -------- --------- Cash flows from financing activities: Proceeds from issuance of common stock, options and warrants ................ 3,015 412 (139) --- Proceeds from revolving line of credit and long-term borrowings ............. 214,286 253,853 --- 2,656 Proceeds from exercise of common stock rights ............................... --- 24,548 --- --- Principal payments on long-term debt ........................................ (132,197) (271,288) (22,646) (15,332) Payments related to the issuance and extinguishment of debt ................. (5,541) (12,647) --- --- --------- --------- -------- --------- Net cash provided by (used in) financing activities .................... 79,563 (5,122) (22,785) (12,676) --------- --------- -------- --------- Effect of exchange rate changes on cash ......................................... (1,136) (16) (172) 691 --------- --------- -------- --------- Increase (decrease) in cash and cash equivalents ................................ (40,339) 19,862 (17,130) 35,913 Cash and cash equivalents at beginning of period ................................ 58,060 38,198 55,328 19,415 --------- --------- -------- --------- Cash and cash equivalents at end of period ...................................... $ 17,721 $ 58,060 $ 38,198 $ 55,328 --------- --------- -------- --------- --------- --------- -------- ---------
See notes to the consolidated financial statements A-5 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Predecessor Reorganized Company Company --------------------------------------------------------------- Four Eight Year Ended Year Ended Months Ended Months Ended September 30, September 30, September 30, May 31, (dollars in thousands) 1998 1997 1996 1996 --------------------------------------------------------------- Cash paid during the period for: Interest ......................... $27,277 $15,016 $5,581 $11,613 Income taxes ..................... $ 5,150 $ 6,612 $2,942 $ 3,045
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: See Note 3 for discussion of non-cash activity related to Fresh Start Reporting and the Reorganization.
Predecessor Reorganized Company Company ---------------------------------------------------------- Four Eight Year Ended Year Ended Months Ended Months Ended September 30, September 30, September 30, May 31, (dollars in thousands) 1998 1997 1996 1996 ---------------------------------------------------------- Notes payable issued ............................... --- --- $ 500 --- Assets acquired by assuming liabilities ............ $11,955 $ 1,553 --- --- Interest on subordinated notes satisfied with additional notes ............................... --- $11,960 --- ---
See notes to the consolidated financial statements. A-6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Anacomp, Inc. and Subsidiaries
Capital in Cumulative Common excess of translation Accumulated (Dollars in thousands) Stock par value adjustment Deficit Total - -------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1995 - PREDECESSOR COMPANY... $462 $182,725 $ 1,329 $(372,759) $(188,243) Preferred stock conversion............................ 11 7,893 ---- ---- 7,904 Preferred stock dividends............................. ---- ---- ---- (516) (516) Accretion of redeemable preferred stock discount...... ---- ---- ---- (24) (24) Translation adjustment for eight months............... ---- ---- (1,560) ---- (1,560) NBS stock issuance.................................... 11 (11) ---- ---- ---- Reorganization........................................ (484) (190,607) 231 208,329 17,469 New stock issuance.................................... 100 79,666 ---- ---- 79,766 Net income for eight months........................... ---- ---- ---- 164,970 164,970 ------ -------- ------- -------- --------- BALANCE AT MAY 31, 1996 - REORGANIZED COMPANY........ 100 79,666 ---- ---- 79,766 Common Stock issued for restricted stock award........ 1 791 ---- ---- 792 Fees associated with rights offering.................. ---- (139) ---- ---- (139) Translation adjustment for four months................ ---- ---- 159 ---- 159 Net loss for four months.............................. ---- ---- ---- (22,009) (22,009) ------ -------- ------- -------- --------- BALANCE AT SEPTEMBER 30, 1996 - REORGANIZED COMPANY... 101 80,318 159 (22,009) 58,569 Common Stock issued for exercise of rights............ 36 24,511 ---- ---- 24,547 Common Stock issued for exercise of stock options..... 1 500 ---- ---- 501 Translation adjustment for twelve months ............. ---- ---- (1,287) ---- (1,287) Other................................................. ---- ---- ---- 1 1 Net loss for twelve months............................ ---- ---- ---- (67,811) (67,811) ------ -------- ------- -------- --------- BALANCE AT SEPTEMBER 30, 1997 - REORGANIZED COMPANY... 138 105,329 (1,128) (89,819) 14,520 Common Stock issued for exercise of stock options and 4 2,668 ---- ---- 2,672 warrants.............................................. Common Stock issued for employee stock purchases...... 1 905 ---- ---- 906 Common Stock issued as incentive compensation......... ---- 584 ---- ---- 584 Translation adjustment for twelve months ............. ---- ---- 1,575 1,575 Net loss for twelve months............................ ---- ---- ---- (67,749) (67,749) ------ -------- ------- -------- --------- BALANCE AT SEPTEMBER 30, 1998 - REORGANIZED COMPANY... $143 $109,486 $447 $ (157,568) $(47,492) ------ -------- ------- -------- --------- ------ -------- ------- -------- ---------
See notes to the consolidated financial statements. A-7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Anacomp, Inc. and Subsidiaries NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CONSOLIDATION The consolidated financial statements include the accounts of Anacomp, Inc. ("Anacomp" or the "Company") and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Due to the Reorganization and implementation of Fresh Start Reporting, the consolidated financial statements for the Reorganized Company (period starting May 31, 1996) are not comparable to those of the Predecessor Company. For financial reporting purposes, the effective date of the emergence from bankruptcy is considered to be the close of business on May 31, 1996. A black line has been drawn on the accompanying consolidated financial statements to distinguish between the Reorganized Company and the Predecessor Company. FOREIGN CURRENCY TRANSLATION Substantially all assets and liabilities of Anacomp's international operations are translated at the year-end exchange rates; income and expenses are translated at the average exchange rates prevailing during the year. Translation adjustments are accumulated in a separate section of stockholders' equity. Foreign currency transaction gains and losses are included in the Consolidated Statement of Operations. SEGMENT REPORTING Anacomp operates in a single business segment providing equipment, supplies and services for document management, including storage, processing and retrieval. MANAGEMENT ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current available information and actual results could differ from those estimates. REVENUE RECOGNITION Revenues from sales of products and services or from lease of equipment under sales-type leases are recorded based on shipment of products or performance of services. Under sales-type leases, the present value of all payments due under the lease contracts is recorded as revenue, cost of sales is charged with the book value of the equipment plus installation costs, and future interest income is deferred and recognized over the lease term. Operating lease revenues are recognized during the applicable period of customer usage. Revenues from maintenance contracts are deferred and recognized in earnings on a pro rata basis over the period of the agreements. INVENTORIES Inventories are stated at the lower of cost or market, with cost being determined by methods approximating the first-in, first-out basis. A-8 RESTRICTED CASH Restricted cash represents cash reserved as collateral for letters of credit issued by the Company or cash held in escrow primarily to secure certain contingent obligations of the Company. The contingent obligations are primarily related to environmental liabilities and certain insurance policies. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciated or amortized using the straight-line method over estimated useful lives. Buildings are depreciated over ten to forty years. Leasehold improvements are amortized over the shorter of their estimated useful life or the remaining term of the related lease. Tooling costs are amortized over the total estimated units of production, not to exceed three years. Other property and equipment have useful lives ranging from two to twelve years. The Company incurred $9.0, $10.6, and $10.7 million in maintenance and repair costs during the years ended September 30, 1998, 1997, and 1996, respectively. In accordance with Fresh Start Reporting, property and equipment were reflected at fair market values as of May 31, 1996 (See Note 3). DEBT ISSUANCE COSTS The Company capitalizes all costs related to its issuance of debt and amortizes those costs using the effective interest method over the life of the related debt instruments. Unamortized Debt issuance costs were $8.6 million at September 30, 1998 and are included in "Other assets" in the accompanying Consolidated Balance Sheets. During the years ended September 30, 1998 and 1997 and the eight months ended May 31, 1996, the Company amortized $1.6, $0.9 and $1.0 million, respectively, of debt issuance costs which are included in "Interest expense and fee amortization" in the accompanying Consolidated Statements of Operations. The Company refinanced certain long-term obligations in June 1998 which resulted in the write-off of $1.9 million of unamortized debt issue costs which is recorded as an extraordinary item, net of income tax, for the year ended September 30, 1998. The Company refinanced certain long-term obligations in March 1997 which resulted in the write-off of $16.9 million of unamortized debt issue costs which is recorded as an extraordinary item, net of income tax, for the year ended September 30, 1997. The Company wrote off deferred debt issuance costs of $11.1 million upon the date of the bankruptcy filing. These costs are included in "Reorganization Items" in the accompanying Consolidated Statements of Operations for the eight months ended May 31, 1996. GOODWILL Excess of purchase price over net assets of businesses acquired ("goodwill") is amortized on the straight-line method over the estimated periods of future demand for the related products acquired. Goodwill at September 30, 1998 is being amortized over periods of three to fifteen years. Effective with Fresh Start Reporting, the Company now measures impairment based on estimated future cash flows of the related products. REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCATED TO IDENTIFIABLE ASSETS As more fully discussed in Note 3, the Company has "reorganization value in excess of amounts allocated to identifiable assets" of $88.2 million net of accumulated amortization of $177.0 million at September 30, 1998. This asset is being amortized over a 3.5 year period beginning May 31, 1996. The carrying value of the Reorganization Asset will be periodically reviewed if the facts and circumstances suggest that it may be impaired. The Company will measure the impairment based upon future cash flows of the Company over the remaining amortization period. RESEARCH AND DEVELOPMENT The engineering costs associated specifically with research and development programs are expensed as incurred, and amounted to $3.9 and $4.8 million for the years ended September 30, 1998 and 1997, respectively. These A-9 costs totaled $1.3 million for the four months ended September 30, 1996 and $2.4 million for the eight months ended May 31, 1996. The Company supports several engineering processes, including basic technological research, product development and sustaining engineering support for existing customer installations. SOFTWARE COSTS Software product costs incurred from the time technological feasibility is reached until the product is available for general release to customers are capitalized and reported at the lower of cost or net realizable value. Such costs are amortized over the greater of the estimated units of sale or under the straight-line method not to exceed five years. Unamortized deferred software costs remaining as of September 30, 1998 total $0.6 million. ACCRUED LEASE RESERVES Other noncurrent liabilities include reserves established for unfavorable facility and equipment lease commitments, vacant facilities and related future lease costs. Total obligations recorded for these unfavorable lease commitments and future lease and related costs at their estimated amounts were $1.3 and $6.2 million at September 30, 1998 and 1997, respectively. The current portion of these obligations was $0.8 and $4.9 million as of September 30, 1998 and 1997, respectively. INCOME TAXES Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred tax asset and/or liability is computed for both the expected future impact of temporary differences between the financial statement and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be "more likely than not" realized in future tax returns. CASH AND CASH EQUIVALENTS Anacomp considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. These temporary investments, primarily repurchase agreements and other overnight investments, are recorded at cost, which approximates market. EARNINGS (LOSS) PER SHARE Basic earnings per share is computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share is based upon the weighted average number of common shares outstanding and dilutive Common Stock equivalents during the period. Common stock equivalents include options granted under the Company's stock option plans using the treasury stock method and common shares expected to be issued under the Company's employee stock purchase plan. Common stock equivalents were not used to calculate diluted earnings per share because of their anti-dilutive effect. There are no reconciling items in calculating the numerator for basic and diluted earnings per share for any of the periods presented. The weighted average number of common shares outstanding and net income (loss) per common share for periods prior to May 31, 1996 have not been presented because, due to the Reorganization and implementation of Fresh Start Reporting, they are not comparable to subsequent periods. NOTE 2. FINANCIAL REORGANIZATION: On May 20, 1996 (the "Confirmation Date"), the U.S. Bankruptcy Court confirmed the Company's Third Amended Joint Plan of Reorganization (the "Reorganization"), and on June 4, 1996, the Company emerged from bankruptcy. Pursuant to the Reorganization, on such date certain indebtedness of the Company was canceled in exchange for cash, new indebtedness, and /or new equity interests, certain indebtedness was reinstated, certain other prepetition claims were discharged, certain claims were settled, executory contracts and unexpired leases were assumed or rejected, and the members of a new Board of Directors of the Company were designated. The Company simultaneously distributed to creditors approximately $22 million in cash, $112.2 million principal amount of its 11-5/8% Senior Secured Notes due 1999 (the "Senior Secured Notes") and $160 million principal A-10 amount of its 13% Senior Subordinated Notes due 2002 (the "Senior Subordinated Notes"), equity securities consisting of 10 million shares of new Common Stock and 362,694 warrants, each of which is convertible into 1.0566 shares of new Common Stock during the five year period ending June 3, 2001 at an exercise price of $11.57 per share. The process began January 5, 1996, when Anacomp filed a Prenegotiated Plan of Reorganization with the U.S. Bankruptcy Court in Delaware under Chapter 11 of the U.S. Bankruptcy Code. The Company was in default under substantially all of its debt agreements as a result of its failure to make $89.7 million of principal payments scheduled for April 26, 1995 and October 26, 1995 on the senior secured credit facilities (including $60 million relating to the revolving loan agreement which expired on October 26, 1995), $11.4 million of principal and interest payments on the 9% Convertible Subordinated Debentures which were due January 15, 1996, $34.1 million of interest payments scheduled for May 1, 1995 and November 1, 1995 on its Senior Subordinated Notes, and $3.2 million of interest payments scheduled for July 15, 1995 and January 15, 1996 on the 13.875% Convertible Subordinated Debentures, as well as certain financial covenant violations, and the cross-default provisions of the other debt agreements. NOTE 3. FRESH START REPORTING AND BANKRUPTCY REORGANIZATION: As noted above, upon emerging from bankruptcy, the Company's Revolving Loan, Multi-Currency Revolving Loan, Term Loans, Series B Senior Notes, 15% Senior Subordinated Notes, 13.875% Convertible Subordinated Debentures and 9% Convertible Subordinated Debentures were canceled. In addition, the Company's 8.25% Cumulative Convertible Redeemable Exchangeable Preferred Stock, Common Stock, Warrants and Stock Options were canceled. In connection therewith, the Company issued new debt and equity securities as mentioned above. As of May 31, 1996, the Company adopted Fresh Start Reporting in accordance with the American Institute of Certified Public Accountant's Statement of Position 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Fresh Start Reporting resulted in material changes to the Consolidated Balance Sheet, including valuation of assets, intangible assets (including goodwill) and liabilities at fair market value and valuation of equity based on the appraised reorganization value of the ongoing business. The net result of the valuation of identifiable assets, the recognition of liabilities at fair market value and the valuation of equity was the Reorganized Company recognizing an asset "Reorganization Value in excess of identifiable assets" totaling $267.5 million as of May 31, 1996. As a result of the Bankruptcy Reorganization, the Predecessor Company recorded an extraordinary gain resulting from the discharge of indebtedness of $52.4 million calculated as follows:
(dollars in thousands) May 31, 1996 ---------------------------------------------------------------- ------------- Historical carrying value of old debt securities ............... $ 379,256 Historical carrying value of related accrued interest........... 48,500 Unamortized portion of old deferred financing costs............. (600) Market value of consideration exchanged for the old debt: Plan securities (face value $279,692)................... (265,948) New Common Stock (10.0 million new shares issued)....... (79,766) ------------- 81,442 Tax provision........................................ (29,000) ------------- Extraordinary gain .................................. $ 52,442 ------------- -------------
A-11 In accordance with SOP 90-7, expenses of the Predecessor Company resulting from the Chapter 11 Reorganization are reported separately as reorganization items in the accompanying Consolidated Statements of Operations, and are summarized below:
Eight Months Ended (dollars in thousands) May 31, 1996 ---------------------------------------------------------------- ------------ Write-off of deferred debt issue costs and discounts............ $ (17,551) Adjustment of assets and liabilities to fair market value....... 124,903 Legal and professional fees associated with bankruptcy.......... (14,944) Interest earned on accumulated cash............................. 431 ------------ $ 92,839 ------------
The following Pro Forma Condensed Financial Information for the twelve months ended September 30, 1996, have been prepared giving effect to the sale of the Image Conversion Services ("ICS") Division and the adjustments related to the consummation of the Reorganization for interest expense and intangible asset amortization. The Condensed Financial Information was prepared as if the Pro Forma adjustments had occurred on October 1, 1995. This information does not purport to be indicative of the results which would have been obtained had such transactions in fact been completed as of the date hereof and for the periods presented or that may be obtained in the future. ANACOMP, INC. AND SUBSIDIARIES PRO FORMA CONDENSED FINANCIAL INFORMATION
Pro Forma Year Ended (dollars in thousands) September 30, 1996 --------------------------------------------------------------- ------------ Total Revenues................................................. $ 484,637 Operating costs and expenses................................... 493,291 Loss before interest, other income, reorganization items, Income taxes and extraordinary credit........................ (8,654) Interest expense and fee amortization.......................... (41,327) Net loss available to Common Stockholders...................... (53,713)
NOTE 4. SALE OF ICS DIVISION: Effective November 1, 1995, Anacomp sold its ICS Division for approximately $13.5 million, which resulted in a net gain to the Company of $6.2 million that is reflected in "other income (expense)" in the accompanying Consolidated Statement of Operations. The proceeds from this sale were used to reduce the principal balance on certain senior debt. The ICS Division performed source document microfilm services at several facilities around the country generating approximately $20 million of revenues per year. A-12 NOTE 5. FAIR VALUES OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information for certain financial instruments. The carrying amounts for trade receivables and payables are considered to be their fair values. The carrying amounts and fair values of the Company's other financial instruments at September 30, 1998, and 1997, are as follows:
September 30, 1998 September 30, 1997 ----------------------- ----------------------- Carrying Carrying (dollars in thousands) Amount Fair Value Amount Fair Value -------- ---------- --------- ---------- Long-Term Debt: Multicurrency Revolving Loan.................... --- --- $2,439 $ 2,439 Senior Secured Term Loan........................ --- --- 55,000 55,000 10 7/8% Senior Subordinated Notes Series B...... $ 196,989 $ 200,000 196,611 210,160 10 7/8% Senior Subordinated Notes Series D...... 140,192 135,000 --- ---
The September 30, 1998 and 1997 estimated fair value of Long-Term Debt was based on quoted market values. NOTE 6. ACQUISITIONS: During the three years ended September 30, 1998, Anacomp made the acquisitions set forth below, each of which has been accounted for as a purchase. The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions, excluding First Image, were not significant. FISCAL 1998 During fiscal 1998, excluding the First Image acquisition discussed separately in Note 7, Anacomp acquired either the customer bases and other assets or the stock of nine businesses. Total consideration paid at the closing was $17.9 million of which approximately $12.5 million was assigned to excess of purchase price over net assets acquired. The aggregate purchase prices consisted of $17.0 million cash at closing, $0.9 million in assumed liabilities and contingent cash payments of up to $10.9 million based upon future operating results over the next ten years from the acquisition date. FISCAL 1997 During fiscal 1997, Anacomp acquired either the customer bases and other assets or the stock of nine businesses. Total consideration was $25.5 million, of which approximately $18.3 million was assigned to excess of purchase price over net assets acquired. The aggregate purchase prices consisted of $22.4 million cash, $1.6 million in assumed liabilities and contingent cash and/or stock payments of up to $10.0 million based upon future operating results over the next two to five years from the acquisition date. FISCAL 1996 During fiscal 1996, Anacomp acquired certain assets of one business. Total consideration was $4.3 million, of which approximately $2.4 million was assigned to excess of purchase price over net assets acquired. The purchase price consisted of $3.8 million in cash and a one-year note payable of $0.5 million which accrued interest at prime. A-13 NOTE 7. FIRST IMAGE ACQUISITION: On June 18, 1998, the Company completed its acquisition (the "Acquisition") of assets constituting substantially all of the business and operations (the "First Image Businesses") of First Image Management Company ("First Image"), a division of First Financial Management Corporation ("FFMC"), a wholly owned subsidiary of First Data Corporation ("FDC"). The Company also assumed substantially all of the ongoing liabilities of the First Image Businesses. The purchase price paid by the Company to FFMC at the closing of the Acquisition was $150.0 million, although a post-closing adjustment has resulted in FFMC returning to the Company $4.4 million to reflect a shortfall in the agreed-upon working capital for the First Image Businesses. The Acquisition was accounted for as a purchase, and the excess of the purchase price over the estimated fair value of net assets acquired ("goodwill") approximates $100.0 million, which is being amortized over a 15-year period on a straight-line basis. For reporting purposes, the Acquisition date was set as June 1, 1998 because the significant contingencies associated with the definitive agreement between the Company, FFMC and FDC were all cleared and the Company received the economic benefits and assumed the economic risks associated with the operations of the First Image Businesses beginning June 1, 1998. The First Image Businesses include (i) image access services, primarily Computer Output to Microfilm ("COM") and Compact Disc ("CD") services (the "IAS Business"), (ii) document print and distribution services such as laser print and mail and demand publishing services (the "DPDS Business") and (iii) document acquisition services such as health care and insurance claims entry and data capture services (the "DAS Business"). The Company has retained and continues to operate the IAS Business whose revenues and earnings before interest, other expense, taxes, restructuring charges, depreciation and amortization ("EBITDA") of $37.7 million and $9.7 million, respectively, for the period June 1, 1998 to September 30, 1998 are included in the Company's results of operations for the fiscal year ended September 30, 1998. The Company closed the sale of the DAS Business to ACS Shared Services, Inc., a wholly owned subsidiary of Affiliated Computer Services, Inc., effective July 1, 1998. The Company also closed the sale of the DPDS Business to Southern Micrographix Company LLC (now known as AccuDocs LLC) effective August 1, 1998. The Company generated $45.0 million in cash from the sale of both Businesses and liquidation of related working capital. Combined, the two Businesses accounted for 44% of First Image's revenues for the year ended December 31, 1997. The Company has excluded the results of operations for the DAS and DPDS Businesses from the Company's results of operations for the year ended September 30, 1998. The unaudited pro forma consolidated operating data of the Company for the year ended September 30, 1998 and 1997 are presented below. The unaudited pro forma consolidated operating data for the year ended September 30, 1998 includes the Company's operations for the year ended September 30, 1998 and First Image's operations for the eight months ended May 31, 1998. The unaudited pro forma consolidated operating data for the year ended September 30, 1997 includes the Company's operations for the year ended September 30, 1997 and First Image's operations for the year ended December 31, 1997. The unaudited pro forma consolidated operating data have been prepared giving effect to the IAS businesses acquisition, the disposition of the DAS and DPDS Businesses and the use of the proceeds thereof, the new Senior Secured Revolving Credit Facility and Senior Subordinated Notes (as each such term is described in Note 12 below), and the fiscal year 1997 refinancings as if they had all occurred at the beginning of the applicable results of operations period. The unaudited pro forma consolidated operating data is not necessarily indicative of the results that would have been obtained had such transactions in fact been completed at the beginning of the periods presented nor is such information indicative of future results.
Year ended September 30, ----------------------------- (dollars in thousands) 1998 1997 - ----------------------------------------- ---------- ----------- Total revenues .......................... $ 570,872 $ 571,453 Net loss before extraordinary item ...... (60,106) (46,000)
A-14 NOTE 8. RESTRUCTURING RESERVES: In connection with the acquisition of First Image, the Company recorded certain reserves associated with the restructuring of the Company's existing business and the acquired business. The reserves associated with costs to be incurred related to restructuring the Company's existing business are charged to expense while the reserves associated with restructuring costs to be incurred related to the acquired business are recorded as a purchase accounting adjustment and does not effect the operating results of the Company. Included in the Company's operating results for the year ended September 30, 1998 are restructuring charges of $8.5 million. These charges result from the Company's acquisition of the First Image Businesses as the Company plans to close down Anacomp sites with multiple market presence in certain cities and convert First Image customers to Anacomp equipment. These restructuring activities are expected to be completed during fiscal year 1999. The restructuring charges consist of personnel related costs of $2.7 million, facility closedown costs of $4.8 million, and other costs of $1.0 million. The Company incurred $1.1 million of personnel costs primarily related to severance expenditures and $0.4 million of other administrative costs during the year ended September 30, 1998. The Company recorded $11.7 million in reserves related to the restructuring of the First Image Businesses as the Company planned to integrate the First Image corporate functions into Anacomp's and also planned to close down certain First Image sites where the Company will have a multiple market presence. These restructuring activities are expected to be completed during fiscal year 1999. The restructuring charges consist of personnel related costs of $4.5 million, facility closedown costs of $3.6 million, and other costs of $3.6 million. The Company incurred $0.1 million of personnel costs primarily related to severance expenditures, $0.2 million in facility costs, and $1.7 million of other administrative costs during the year ended September 30, 1998. NOTE 9. SKC AGREEMENT: Anacomp has entered into a supply agreement (the "Supply Agreement") with SKC America, Inc., a New Jersey corporation ("SKCA"), and SKC Limited ("SKCL"), an affiliated corporation of SKCA organized pursuant to the laws of the Republic of Korea. SKCA and SKCL are collectively referred to as "SKC". The Supply Agreement expires in December 2003. Pursuant to the Supply Agreement, Anacomp purchases substantially all of its requirements for coated duplicate microfilm from SKC. Pursuant to the Supply Agreement, SKC also provides the Company with a substantial portion of its polyester requirements for its magnetic media products. In connection with the Supply Agreement, SKC also provided the Company with a $25.0 million trade credit facility which was reduced to $15.0 million in fiscal 1997 and further reduced to $5.0 million in fiscal 1998 (secured by up to $5.0 million of products sold to the Company by SKC), all of which is outstanding at September 30, 1998. The trade credit arrangement bears interest at 1.75% over the prime rate of The First National Bank of Boston (10.0% as of September 30, 1998). In connection with an amendment to the Supply Agreement as of the effective date under the Plan of Reorganization, the Company agreed to certain price increases, retroactive to 1994, and agreed to make the following deferred payments related to the retroactive price increases to SKC (which were accrued in "Other accrued liabilities" in the accompanying Consolidated Balance Sheets): The Company is committed to pay $0.8 million, $0.8 million, and $1.0 million in 1999, 2000, and 2001, respectively which is accrued in "Other accrued liabilities" in the accompanying Consolidated Balance Sheets. A-15 NOTE 10. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
September 30, --------------------------- (dollars in thousands) 1998 1997 --------- -------- Accounts and Notes Receivable: --------------------------------------------------------------------- Trade receivables, net of allowance for doubtful accounts of $5,299 and $5,501, respectively................................. $ 76,511 $ 53,901 Other................................................................ 2,598 4,727 --------- -------- $ 79,109 $ 58,628 --------- -------- --------- -------- Inventories: --------------------------------------------------------------------- Finished goods....................................................... $ 14,946 $ 14,887 Work in process...................................................... 3,583 3,299 Raw materials and supplies........................................... 10,089 7,075 --------- -------- $ 28,618 $ 25,261 --------- -------- --------- -------- Property and equipment: --------------------------------------------------------------------- Land and buildings................................................... $ 6,377 $ 3,286 Office Furniture..................................................... 6,674 2,765 Manufacturing equipment and tooling.................................. 5,431 4,442 Field support spare parts............................................ 5,077 5,875 Leasehold improvements............................................... 3,225 645 Equipment leased to others........................................... 2,552 2,185 Processing equipment................................................. 32,483 17,122 --------- -------- 61,819 36,320 Less accumulated depreciation and amortization....................... (20,070) (7,257) --------- -------- $ 41,749 $ 29,063 --------- -------- --------- -------- Excess of Purchase Price Over Net Assets of Businesses Acquired: --------------------------------------------------------------------- Goodwill............................................................. $ 134,862 $ 20,673 Less accumulated amortization........................................ (14,048) (2,873) --------- -------- $ 120,814 $ 17,800 --------- -------- --------- -------- Other Accrued Liabilities: --------------------------------------------------------------------- Restructuring reserves (see Note 8).................................. $ 16,786 $ --- Unfavorable lease commitment related to sale/leaseback transactions.. 811 3,755 EPA reserve.......................................................... 3,331 6,779 Other................................................................ 18,871 23,995 --------- -------- $ 39,799 $ 34,529 --------- -------- --------- --------
A-16 NOTE 11. LONG-TERM RECEIVABLES:
September 30, (dollars in thousands) --------------------- Long-term receivables: 1998 1997 -------------------------------------------------------------- ------- ------- Lease contracts receivable.................................... $13,219 $ 8,785 Other......................................................... 1,424 1,449 ------- ------- 14,643 10,234 Less current portion.......................................... (5,641) (3,647) ------- ------- $ 9,002 $ 6,587 ------- ------- ------- -------
Lease contracts receivable result from customer leases of products under agreements which qualify as sales-type leases. Annual future lease payments to be received under sales-type leases are as follows:
Year Ended (Dollars in thousands) September 30, ------------------------------------------ ------------- 1999...................................... $6,702 2000...................................... 4,602 2001...................................... 2,485 2002...................................... 816 2003...................................... 551 ------------- 15,156 Less deferred interest.................... (1,937) ------------- $13,219 ------------- -------------
NOTE 12. LONG-TERM DEBT: Long-term debt is comprised of the following:
September 30, ---------------------- (dollars in thousands) 1998 1997 -------------------------------------------------------------- -------- -------- Senior Secured Revolving Credit Facility...................... $ --- $ --- Multicurrency Revolving Loan.................................. --- 2,439 Senior Secured Term Loan...................................... --- 55,000 10 7/8% Senior Subordinated Notes Series B, net of unamortized discount of $3.0 and $3.4 million............... 196,989 196,611 10 7/8% Senior Subordinated Notes Series D, including unamortized premium of $5.2 million......................... 140,192 --- Other......................................................... 2,855 3,434 -------- -------- 340,036 257,484 Less current portion.......................................... (1,152) (9,595) -------- -------- $338,884 $247,889 -------- -------- -------- --------
SENIOR SECURED REVOLVING CREDIT FACILITY On June 15, 1998, the Company entered into a new $80 million Senior Secured Revolving Credit Facility (the "New Facility") with a syndicate of banks and BankBoston, N.A. ("BankBoston") as agent. Proceeds of the New Facility were used to repay the outstanding balance of the existing $80 million Senior Secured Term Loan and Multi-currency Revolving Loan (the "Old Facility"). The balance of the Old Facility at June 15, 1998, was $53.6 million. A-17 The Company used cash generated from the sale of the DAS Business and DPDS Business combined with cash generated from the Company's operations to repay the outstanding balance under the New Facility. As of September 30, 1998, there were no amounts outstanding under the New Facility. The New Facility is available for loans denominated in U.S. dollars and certain foreign currencies. In addition, up to $15 million of the New Facility is available for letters of credit. Letters of credit outstanding against the New Facility totaled $3.4 million at September 30, 1998. The New Facility terminates on June 15, 2003. The Company may elect to have loans under the New Facility bear interest at (a) the Base Rate (as defined below) plus 0-3/4% or (b) the Eurocurrency Rate (as defined below) plus 1-2%. Interest is payable quarterly under the Base Rate loans and payable either quarterly or at the end of the interest period if less than three months under the Eurocurrency Rate loans. The "Base Rate" for any day means the higher of (i) the corporate base rate of interest announced by BankBoston and (ii) the federal funds rate published by the Federal Reserve Bank of New York on the next business day plus 1/2%. The "Eurocurrency Rate" means the Eurodollar Rate or the International Eurocurrency Rate as defined and offered by BankBoston. The New Facility is secured by virtually all of the Company's assets and 65% of the capital stock of the Company's foreign subsidiaries. Among other restrictions, the New Facility contains certain covenants with respect to the Company relating to limitations on additional debt, limitations on mergers and acquisitions, limitations on liens, minimum EBITDA, interest coverage and leverage ratios. 10 7/8% SENIOR SUBORDINATED NOTES On June 18, 1998, the Company issued $135 million of additional 10 7/8% Senior Subordinated Notes (the "Series C Notes"). The Series C Notes were sold at 104% of the face amount to yield proceeds of $140.4 million which resulted in a $5.4 million premium to be offset against interest expense over the life of the Series C Notes. The proceeds from the Series C Notes, along with available cash, were used to finance the Acquisition (see Note 7). In August 1998, the Company filed an Exchange Offer Registration Statement with the SEC to exchange the Series C Notes for new Series D Notes registered under the Securities Act. The 10 7/8% Series B and Series D Senior Subordinated notes ("the Notes") are not redeemable at the option of the Company prior to April 1, 2000. On or after such date and until April 1, 2003, the Notes will be redeemable at the option of the Company in whole or in part at prices ranging from 108.156% to 102.710% plus accrued and unpaid interest. On or after April 1, 2003, the Notes may be redeemable at 100% plus accrued and unpaid interest. Prior to April 1, 2000, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings (as defined), to redeem up to 35% of the aggregate principal amount at a redemption price equal to 110.875% plus unpaid interest to the date of redemption, provided that at least $87.75 million of the aggregate principal amount of Notes originally issued remains outstanding after such redemption. Also, upon a Change of Control (as defined), the Company is required to make an offer to purchase the Notes then outstanding at a purchase price equal to 101% plus accrued and unpaid interest. Interest on the Notes is payable semi-annually. The Notes have no sinking fund requirements and are due in full on April 1, 2004. The Notes are general unsecured obligations of the Company and expressly subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company. The Notes will rank pari passu with any future Senior Subordinated Indebtedness (as defined) and senior to all Subordinated Indebtedness (as defined) of the Company. The indenture relating to the Notes contains covenants with respect to the Company related to limitations of indebtedness of the Company and restricted subsidiaries, limitations on restricted payments, limitations on distributions from restricted subsidiaries, limitations on sale of assets and restricted subsidiary stock, limitations on liens, a prohibition on layering, limitations on transactions with affiliates, limitations on issuance and sale of capital stock of restricted subsidiaries, limitations of sale/leaseback transactions and limitations on mergers, consolidations or sales of substantially all of the Company's assets. NOTE 13. RIGHTS OFFERING: On October 30, 1996, the Company completed a rights offering to its existing shareholders that resulted in the issuance of 3.6 million shares of Common Stock. For each share of Anacomp Common Stock held as of the close of business on September 18, 1996, the Company distributed 0.36 rights to purchase an additional share of Common A-18 Stock at a subscription price of $6.875 per share. The Company used the proceeds of the rights offering, approximately $25 million, for the acquisition of businesses, assets and technologies. NOTE 14. CAPITAL STOCK: PREFERRED STOCK The Board of Directors of the Company has the ability, at its discretion, to create one or more series of Preferred Stock and shall determine the preferences, limitations, and relative voting and other rights of one or more series of Preferred stock. WARRANTS In connection with the Reorganization discussed in Note 2, Anacomp issued 362,694 new warrants to certain creditors and previous common and preferred stockholders. Each new warrant was convertible into one share of new Common Stock at an exercise price of $12.23 per share. In connection with the rights offering discussed in Note 13, each new warrant is now convertible into 1.0566 shares of new Common Stock at an exercise price of $11.57 per share. The new warrants expire on June 3, 2001. At September 30, 1998, 362,015 warrants were outstanding. NOTE 15. STOCK PLANS: On July 22, 1996, the Company's Board of Directors approved the 1996 Restructure Recognition Incentive Plan. Under this plan, effective August 22, 1996, the Company awarded to employees 947,500 stock options to acquire new Common Stock and 99,050 shares of restricted new Common Stock. With regard to the stock options, the options were granted at an exercise price of $4.63 per share of new Common Stock which will result in approximately $3.2 million of compensation expense over the vesting period of the options based on the market value of the stock at August 22, 1996. 75% of the options vest ratably during the period from June 30, 1997 to June 30, 1999. 25% of the options vest on September 30, 1999, provided certain performance goals have been met; otherwise the options vest on June 30, 2003. The Company recognized $1.0, $1.0, and $0.2 million of compensation expense related to the options issued and the restricted stock award during the fiscal years ended September 30, 1998 and 1997 and for the four months ended September 30, 1996, respectively. The options expire 10 years after the date of the grant. With regard to the restricted shares of new Common Stock, the shares vested immediately and thus the Company recognized approximately $0.8 million of compensation expense immediately upon granting the award based on the market value of the Company's stock on August 22, 1996. The shares were restricted from sale or transfer by the recipient employees until after September 30, 1997. Effective December 6, 1996, 34,650 shares of restricted stock were returned by employees to the Company. In April of 1998 the Company awarded 35,000 shares of restricted common stock that were valued at $0.5 million. The Compensation expense related to this award is being amortized to expense over the vesting period. Amortization expense related to this award was $0.3 million for the year ended September 30, 1998. A-19 On February 3, 1997 the Company's shareholders approved the 1996 Long-Term Incentive Plan, which provides for the future issuance of various forms of stock related awards including options, stock appreciation rights and restricted shares. The Company has reserved 1,400,000 shares of new Common Stock for issuance under this plan. Awards, including the nature of the awards and related exercise prices, are to be determined at the discretion of the Compensation Committee of the Board of Directors in accordance with the plan provisions. Transactions under the Company's stock option plans are summarized as follows:
Weighted Ave. Shares Exercise Price ----------- -------------- OUTSTANDING AT JUNE 1, 1996............................ ---- ---- Granted................................................ 947,500 $ 4.63 OUTSTANDING AT SEPTEMBER 30, 1996...................... 947,500 4.63 Granted................................................ 939,205 10.64 Canceled............................................... (135,650) 4.86 Exercised.............................................. (80,000) 5.15 ----------- OUTSTANDING AT SEPTEMBER 30, 1997...................... 1,671,055 7.96 Granted................................................ 979,375 14.31 Canceled............................................... (335,336) 9.41 Exercised.............................................. (309,388) 6.17 ----------- OUTSTANDING AS OF SEPTEMBER 30, 1998 2,005,706 11.36 -----------
The following table summarizes all options outstanding and exercisable by price range as of September 30, 1998:
Weighted Ave. Weighted Weighted Exercise Price Number of Range of Exercise Average Average Options Of Exercisable Options Price Per Share Exercise Price Remaining Life Exercisable Options --------- ----------------- -------------- -------------- ----------- --------------- 610,155 $ 4.63 - $ 8.50 $ 5.32 7.98 Years 230,155 $ 5.05 913,576 $10.63 - $13.75 $12.72 8.88 Years 188,183 $12.35 481,975 $14.63 - $22.81 $15.07 9.53 Years 6,709 $14.96 - --------- 2,005,706 - ---------
On February 3, 1997, the Company's shareholders approved the Anacomp, Inc. 1997 Qualified Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan allows qualified employees to purchase shares of the Company's Common Stock at the lower of 85% of the fair market value at the date of purchase or 85% of the fair market value on the first day of each quarterly offering period. A maximum of 500,000 shares of Common Stock is available for purchase under the Stock Purchase Plan. As of September 30, 1998, 124,052 shares were issued under the plan. The Company has reserved approximately 2.9 million shares of Anacomp new Common Stock for the exercise of stock options, exercise of warrants, employee stock purchases and other corporate purposes. NOTE 16. PROFORMA EARNINGS PER SHARE - SFAS 123: The Company accounts for its Stock Option Plans in accordance with APB Opinion No. 25 ("APB 25"), under which compensation expense is recognized only to the extent the exercise price of the option is less than the fair market value of a share of stock at the date of grant. During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensations (SFAS 123), which considers the stock options as compensation expense to the Company, based on their fair value at the date of grant. Under this standard, the Company has the option of accounting for employee stock option plans as it A-20 currently does or under the new method. The Company uses the APB 25 method for accounting, but has adopted the disclosure requirements of SFAS 123. Had compensation costs for these plans been determined based on their fair value on their grant date, the Company's net loss would have been as follows:
Four Months Year Ended Year Ended Ended September 30, September 30, September 30, (dollar in thousands, except per share data) 1998 1997 1996 ------------- ------------- ------------- Net loss as reported.......................... $(67,749) $(67,811) $(22,009) Pro forma net loss............................ (70,309) (69,940) (22,096) Pro forma loss per share...................... $ (5.04) $ (5.21) $ (2.20)
The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model. The weighted average fair value of options granted during 1998, 1997 and 1996, as well as the weighted average assumptions used to determine the fair values are summarized below:
1998 1997 1996 ---------- ---------- ---------- Fair Value of Options Granted................... $ 7.30 $ 6.73 $ 6.05 Risk-Free Interest Rate......................... 5.69% 6.22% 6.57% Expected Dividend Yield......................... 0% 0% 0% Expected Volatility............................. 46% 40% 40% Expected Life................................... 5 Years 10 Years 10 Years
NOTE 17. INCOME TAXES: The components of income (loss) before income taxes and extraordinary items were:
Predecessor Company ---------------------------------------------------------------- Four Months Eight Months Year Ended Year Ended Ended Ended September 30, September 30, September 30, May 31, (dollars in thousands) 1998 1997 1996 1996 - ------------------------------- ------------- ------------ ------------- ------------ United States.................. $(74,549) $(53,968) $(21,602) $112,100 Foreign........................ 14,414 12,618 3,993 4,128 ------------- ------------ ------------- ------------ $(60,135) $(41,350) $(17,609) $116,228 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
A-21 The components of the consolidated tax provision after utilization of net operating loss carryforwards and the adjustment of tax reserves are summarized below:
Predecessor Company ------------------------------------------------------------------ Four Months Eight Months Year Ended Year Ended Ended Ended September 30, September 30, September 30, May 31, (dollars in thousands) 1998 1997 1996 1996 - --------------------------------- --------------- ----------------- --------------- ---------------- Current: Federal......................... --- $ 300 $ 600 --- Foreign......................... $5,000 5,400 2,400 $ 3,700 State........................... 400 400 100 --- ------ ------ ------ -------- 5,400 6,100 3,100 3,700 Tax reserve adjustment.............. 400 2,800 ---- --- Non-cash charge in lieu of taxes.... --- 700 1,300 29,000 ------ $5,800 $9,600 $4,400 $ 32,700 ------ ------ ------ -------- ------ ------ ------ --------
The income tax provision is included in the Consolidated Statements of Operations as follows:
Predecessor Company ------------------------------------------------------------------ Four Months Eight Months Year Ended Year Ended Ended Ended September 30, September 30, September 30, May 31, (dollars in thousands) 1998 1997 1996 1996 - ---------------------------------------- --------------- ----------------- --------------- ---------------- Provision for income taxes before extraordinary items ............ $ 6,500 $ 15,500 $ 4,400 $ 3,700 Extraordinary gain on discharge of indebtedness ....................... --- --- --- 29,000 Extraordinary loss extinguishment of indebtedness ....................... (700) (5,900) --- --- ------- -------- ------- ------- $ 5,800 $ 9,600 $ 4,400 $32,700 ------- -------- ------- ------- ------- -------- ------- -------
For the reorganized company, the non-cash charge in lieu of taxes represents the utilization of pre-organization tax benefits which are reflected as reductions in the reorganization asset. For the predecessor company, the non-cash charge in lieu of taxes represents the utilization of pre-acquisition tax benefits which are reflected as reductions to goodwill. A-22 The following is a reconciliation of income taxes calculated at the United States federal statutory rate to the provision for income taxes:
Four Months Eight Months Year Ended Year Ended Ended Ended September 30, September 30, September 30, May 31, (dollars in thousands) 1998 1997 1996 1996 - -------------------------------------------------------- ------------- ------------- -------------- ------------ Provision (benefit) for income taxes at U.S. statutory rate......................................... $(21,047) $(14,203) $(6,200) $ 40,700 Non taxable reorganization income................................................... --- ---- ---- (43,700) Nondeductible amortization and write-off of Intangible assets...................................... 27,038 24,359 8,300 2,500 State and foreign income taxes........................... 309 2,677 1,200 2,300 Tax reserve adjustment................................... 400 2,800 ---- ---- Tax effect of pre-reorganization loss not Available due to ownership change ..................... ---- ---- ---- 2,100 Alternative minimum tax.................................. ---- 400 1,000 ---- Other.................................................... (200) (533) 100 (200) -------- -------- ------- -------- $ 6,500 $ 15,500 $ 4,400 $ 3,700 -------- -------- ------- -------- -------- -------- ------- --------
The components of deferred tax assets and liabilities are as follows:
(dollars in thousands) September 30, --------------------------- Net Deferred Tax Asset: 1998 1997 - ------------------------------------------------------------------- ------------ ---------- Tax effects of future temporary differences related to: Inventory reserves ............................................ $ 5,000 $ 9,300 Reserves ...................................................... 6,500 4,700 Depreciation and amortization ................................. 3,500 1,900 Other ......................................................... 2,300 3,900 -------- -------- Net tax effects of future differences ............................. 17,300 19,800 -------- -------- Tax effects of carryforward benefits: Federal net operating loss carryforwards ...................... 62,000 59,900 Federal general business tax credits .......................... 1,100 3,200 Foreign tax credits ........................................... 3,000 3,000 -------- -------- Tax effects of carryforwards ...................................... 66,100 66,100 -------- -------- Tax effects of future taxable differences and carryforwards ....... 83,400 85,900 Less deferred tax asset valuation allowance ....................... (83,400) (85,900) -------- -------- Net deferred tax asset ............................................ $ --- $ --- -------- --------
At September 30, 1998, the Company has NOLs of approximately $155.1 million available to offset future U.S. taxable income. This amount will increase to $198.3 million as certain temporary differences reverse in future periods. Usage of these NOLs by the Company is limited to approximately $4 million annually. However, the Company may authorize the use of other tax planning techniques to utilize a portion of the remaining NOLs before they expire. In any event, the Company expects that substantial amounts of the NOLs will expire unused. The Company has tax credit carryforwards of approximately $4.1 million. These tax credits are principally foreign tax credit carryforwards resulting from the repatriation of a portion of the Company's foreign subsidiaries' accumulated earnings and profits included in U.S. taxable income in 1996. The Company expects that these credits will expire unused. The tax benefits of pre-reorganization net deferred tax assets will be reported first as a reduction of "Reorganization value in excess of identifiable assets" and then as a credit to equity. Effective with the beginning of the year ended September 30, 1998, the Company intends to permanently reinvest the earnings of its foreign subsidiaries, exclusive of those foreign subsidiaries in Brazil, Canada and Japan. For those foreign A-23 subsidiaries in Brazil, Canada, and Japan, the Company will continue to remit and record applicable U.S. income and withholding tax expense on their earnings. As of September 30, 1998, the Company has approximately $13.0 million in undistributed earnings from those foreign subsidiaries that the Company intends to permanently reinvest. These tax benefits will not reduce income tax expense for financial reporting purposes. NOTE 18. COMMITMENTS AND CONTINGENCIES: Anacomp has commitments under long-term operating leases, principally for building space and data service center equipment. Lease terms generally cover periods from five to twelve years. The following summarizes the future minimum lease payments under all noncancelable operating lease obligations, including the unfavorable lease commitments and vacant facilities discussed in Note 1, which extend beyond one year:
Year Ended September 30, ---------------- (dollars in thousands) 1999............................................ $15,742 2000............................................ 10,949 2001............................................ 7,232 2002............................................ 6,959 2003............................................ 3,810 Thereafter...................................... 15,470 ------- $60,162 -------
The total of future minimum rentals to be received under noncancelable subleases related to the above leases is $2.5 million. The Company's rent and lease expense was $18.4 million, $16.6 million, and $19.9 million for the years ended September 30, 1998, 1997, and 1996, respectively. Xidex Corporation, a predecessor company of Anacomp, was designated by the United States Environmental Protection Agency ("EPA") as a potentially responsible party for investigatory and cleanup costs incurred by state and federal authorities involving locations included on a list of EPA's priority sites for investigation and remedial action under the federal Comprehensive Environmental Response, Compensation, and Liability Act. The EPA reserve, disclosed in Note 10, relates to its estimated liability for cleanup costs for the aforementioned locations and other sites. No material losses are expected in excess of the liability recorded. On August 29, 1997, Access Solutions International, Inc. ("ASI") filed a complaint for patent infringement in the U.S. District Court, District of Rhode Island, against Data/Ware Development, Inc. ("Data/Ware"), of which Anacomp is the successor by merger, and Eastman Kodak Company ("Kodak"). The complaint seeks injunctive relief and unspecified damages, including attorney's fees, for alleged infringement by Data/Ware and Kodak of ASI's United States Letters Patent No. 4,775,969 for "Optical Disk Storage Format, Method and Apparatus for Emulating a Magnetic Tape Drive" and No. 5,034,914 for "Optical Disk Storage Method and Apparatus with Buffered Interface." The Company has assumed the defense of this matter on behalf of both Data/Ware and Kodak. Discovery in this matter continues, with any trial to occur after the middle of calendar year 1999. Although there can be no assurance as to the eventual outcome of this matter, the Company believes that it has numerous meritorious defenses which it intends to pursue vigorously. Anacomp also is involved in various claims and lawsuits incidental to its business and management believes that the outcome of any of those matters will not have a material adverse effect on its consolidated financial position or results of operations. NOTE 19. INTERNATIONAL OPERATIONS: Anacomp's international operations are conducted principally through subsidiaries, a substantial portion of whose operations are located in Western Europe. Total International sales includes sales by subsidiaries and through A-24 distributors. Information as to U.S. and international operations for the years ended September 30, 1998 and 1997, the four months ended September 30, 1996 and the eight months ended May 31, 1996 is as follows (dollars in thousands): YEAR ENDED SEPTEMBER 30, 1998 - REORGANIZED COMPANY
U.S. International Elimination Consolidated --------- ------------- ----------- ------------ Customer sales ................................... $ 330,122 $ 168,895 $ --- $ 499,017 Inter-geographic ................................. 21,493 --- (21,493) --- --------- --------- ------- --------- Total sales ...................................... 351,615 168,895 (21,493) 499,017 --------- --------- ------- --------- --------- --------- ------- --------- Operating income (loss) .......................... (45,796) 18,437 --- (27,359) --------- --------- ------- --------- --------- --------- ------- --------- Identifiable assets .............................. $ 360,983 $ 60,170 $ --- $ 421,153 --------- --------- ------- --------- --------- --------- ------- ---------
YEAR ENDED SEPTEMBER 30, 1997 - REORGANIZED COMPANY
U.S. International Elimination Consolidated --------- ------------- ----------- ------------ Customer sales ................................... $ 300,149 $ 162,361 $ --- $ 462,510 Inter-geographic ................................. 20,366 ---- (20,366) ---- --------- --------- ------- --------- Total sales ...................................... 320,515 162,361 (20,366) 462,510 --------- --------- ------- --------- --------- --------- ------- --------- Operating income (loss) .......................... (29,169) 20,654 --- (8,515) --------- --------- ------- --------- --------- --------- ------- --------- Identifiable assets .............................. $ 346,487 $ 45,464 $ --- $ 391,951 --------- --------- ------- --------- --------- --------- ------- ---------
FOUR MONTHS ENDED SEPTEMBER 30, 1996 - REORGANIZED COMPANY
U.S. International Elimination Consolidated --------- ------------- ----------- ------------ Customer sales ................................... $ 102,733 $ 48,809 $ --- $ 151,542 Inter-geographic ................................. 4,449 --- (4,449) ---- --------- --------- ------- --------- Total sales ...................................... 107,182 48,809 (4,449) 151,542 --------- --------- ------- --------- --------- --------- ------- --------- Operating income(loss) ........................... (12,401) 6,637 --- (5,764) --------- --------- ------- --------- --------- --------- ------- --------- Identifiable assets .............................. $ 390,088 $ 45,333 $ --- $ 435,421 --------- --------- ------- --------- --------- --------- ------- ---------
A-25 EIGHT MONTHS ENDED MAY 31, 1996 - PREDECESSOR COMPANY
U.S. International Elimination Consolidated --------- ------------- ----------- ------------ Customer sales ................................... $ 227,742 $ 106,856 $ --- $ 334,598 Inter-geographic ................................. 12,592 ---- (12,592) --- --------- --------- ------- --------- Total sales ...................................... 240,334 106,856 (12,592) 334,598 --------- --------- ------- --------- --------- --------- ------- --------- Operating income (loss) .......................... $ 34,990 $ 6,615 $ --- $ 41,605 --------- --------- ------- --------- --------- --------- ------- ---------
NOTE 20. QUARTERLY FINANCIAL DATA (UNAUDITED):
First Second Third Fourth (dollars in thousands, except per share amounts) Quarter Quarter Quarter Quarter --------- --------- --------- --------- FISCAL 1998 Revenues ......................................... $ 117,814 $ 117,593 $ 121,021 $ 142,589 Gross margin ..................................... 39,085 39,329 40,175 47,801 Loss before extraordinary loss ................... (15,368) (15,855) (21,749) (13,663) Extraordinary loss on extinguishment of debt ..... --- --- (1,857) 743 --------- --------- --------- --------- Net loss ......................................... $ (15,368) $ (15,855) $ (23,606) $ (12,920) --------- --------- --------- --------- --------- --------- --------- --------- Loss before extraordinary item ................... $ (1.11) $ (1.14) $ (1.55) $ (0.96) Extraordinary loss on extinguishment of debt ..... --- --- (0.13) 0.05 --------- --------- --------- --------- Basic net loss per share ......................... $ (1.11) $ (1.14) $ (1.68) $ (0.91) --------- --------- --------- --------- --------- --------- --------- ---------
First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- FISCAL 1997 Revenues ......................................... $ 116,453 $ 114,520 $ 114,041 $ 117,496 Gross margin ..................................... 41,414 38,801 37,782 39,999 Loss before extraordinary loss ................... (12,914) (14,566) (14,856) (14,514) Extraordinary loss on extinguishment of debt ..... --- (12,536) 875 700 --------- --------- --------- --------- Net loss ......................................... $ (12,914) $ (27,102) $ (13,981) $ (13,814) --------- --------- --------- --------- --------- --------- --------- --------- Loss per share before extraordinary item ......... $ (1.01) $ (1.06) $ (1.08) $ (1.05) Extraordinary loss on extinguishment of debt ..... --- (0.92) 0.06 0.05 --------- --------- --------- --------- Basic net loss per share ......................... $ (1.01) $ (1.98) $ (1.02) $ (1.00) --------- --------- --------- --------- --------- --------- --------- ---------
A-26 NOTE 21. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES: The following is a summary of activity in the Company's valuation and qualifying accounts and reserves for the years ended September 30, 1998 and 1997 and for the periods ended September 30, 1996 and May 31, 1996:
Balance at Charged to Balance at beginning costs and end of of period expenses Deductions Other period ---------- ----------- ---------- ----- ----------- (dollars in thousands, except per share amounts) REORGANIZED COMPANY: YEAR ENDED SEPTEMBER 30, 1998 Allowance for doubtful accounts................ $ 5,501 277 479 --- $ 5,299 ------- ----- ----- ------ ------- ------- ----- ----- ------ ------- Restructuring reserves (a)..................... $ --- 8,494 3,422 11,714 $16,786 ------- ----- ----- ------ ------- ------- ----- ----- ------ ------- YEAR ENDED SEPTEMBER 30, 1997 Allowance for doubtful accounts................ $ 6,768 (341) 926 --- $ 5,501 ------- ----- ----- ------ ------- ------- ----- ----- ------ ------- FOUR MONTHS ENDED SEPTEMBER 30, 1996 Allowance for doubtful accounts................ $ 7,464 388 1,084 --- $ 6,768 ------- ----- ----- ------ ------- ------- ----- ----- ------ ------- PREDECESSOR COMPANY: EIGHT MONTHS ENDED MAY 31, 1996 Allowance for doubtful accounts................ $ 7,367 253 156 --- $ 7,464 ------- ----- ----- ------ ------- ------- ----- ----- ------ -------
(a) Other additions include restructuring liabilities recorded in connection with the First Image acquisition. See Note 8. A-27 EXHIBIT INDEX EXHIBIT NUMBER (10) MATERIAL CONTRACTS. (21) SUBSIDIARIES OF THE REGISTRANT. (23) CONSENT OF ARTHUR ANDERSEN, LLP. (27) FINANCIAL DATA SCHEDULE (REQUIRED FOR ELECTRONIC FILING ONLY). A-28 EX-10.4 2 EXHIBIT 10.4/EMPLOYMENT AGREEMENT Exhibit 10.4 EMPLOYMENT AGREEMENT XIDEX UK LIMITED ("Xidex") whose registered office is situate at Intermediate Road, Brynmawr, Gwent NP3 4YA, United Kingdom (1) ANACOMP INC ("Anacomp") whose registered office is situate at 12365 Crosthwaite Circle, Poway, California, 92064, USA (2) AND DR. PETER WILLIAMS of Vagaland, Dardy, Llangattock, Crickhowell, Powys NP8 1PH, United Kingdom ("the Employee") (3) Date of Agreement: May 3, 1995 Effective Date of Agreement: October 1, 1995 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 3rd day of May 1995, AMONG (1) Xidex UK LIMITED, whose registered office is situate at Intermediate Road, Brynmawr, Gwent NP3 4YA (hereinafter referred to as "Xidex"), of the one part and (2) Anacomp Inc whose registered office is situate at 12365 Crosthwaite Circle, Poway, California, 92064 (hereinafter referred to as "Anacomp"); of the other part and; (3) Dr. Peter Williams of Vagaland, Dardy, Llangattock, Crickhowell, Powys NP8 1PU (hereinafter referred to as the "Employee"). The full identification of each party, Date of Agreement and Effective Date of Agreement are all also included on the cover sheet immediately preceding this page, which is incorporated herein by this reference. The following conditions and terms shall apply: ARTICLE I PRIOR AGREEMENT AND JURISDICTION This Agreement takes effect in substitution for all previous contracts, agreements and arrangements, whether written or oral or implied among, Xidex, Anacomp and the Employee relating to the service of the Employee by Xidex, all of which contracts, agreement and arrangements shall be deemed to have been terminated by mutual consent as from the Effective Date of Agreement. This Agreement shall be governed by and interpreted in accordance with English law and each of the parties hereto agrees to submit to the non-exclusive jurisdiction of the English Courts with respect to any claim or matter arising under this Agreement. ARTICLE II APPOINTMENT, SCOPE, TERM OF EMPLOYMENT AND COMPENSATION The Employee's appointment as an employee of Xidex and its predecessor commenced on January 2, 1984, and such employment shall continue, subject as hereinafter provided, until terminated in accordance with Article IX hereof. Xidex and the Employee hereby agree that Addendum I, attached hereto and incorporated herein by this reference, is intended to define the Employee's scope of employment, as well as his assigned responsibilities, the location of his employment, and the Base Salary and Bonus payable to the Employee. The Employee acknowledges and agrees that his compensation is confidential, and that he will only discuss it with Anacomp's Chairman of the Board, President and/or Magnetics Group President, as required. 2 Because Xidex is a wholly-owned subsidiary of Anacomp, and because the Employee is only prepared to enter into this Agreement at the request of Anacomp and on the basis of the guarantee contained in this Article, Anacomp hereby guarantees to the Employee the observance and performance of the obligations of Xidex under this Agreement, and Anacomp hereby undertakes that upon any failure on the part of Xidex to perform any of its obligations hereunder, Anacomp will pay any monies and perform and observe any obligations on the part of Xidex contained in this Agreement. ARTICLE III CONTINUOUS EMPLOYMENT For the purposes of determining the Employee's continuous period of employment pursuant to the Employment Protection (Consolidation) Act 1978, Xidex and Anacomp agree that the Employee's employment hereunder is continuous with Employee's previous employment with Control Data Limited since January 2, 1984. ARTICLE IV HOURS OF WORK The Employee's hours of work will be Monday to Friday, 8:45am to 4:45pm, with a one-half hour for a luncheon break. Additionally, or as reasonably required, the Employee will work such other hours as may be necessary to carry out his duties hereunder. ARTICLE V FRINGE BENEFITS In addition to the Employee's Base Salary and Bonus compensation set forth in Addendum I hereto, the Employee shall be entitled to the following fringe benefits: 1. In addition to the normal 8 days public holidays, 27 days of paid holiday per annum, the timing of which shall be taken with senior management's prior approval. Xidex's holiday year runs from January to December. The Employee's entitlement to holidays shall accrue pro rata throughout each holiday year. The Employee may, with senior management's approval, carry any unused holiday entitlement forward to a subsequent year, or at Anacomp's or Xidex's option receive payment in lieu of such unused holiday entitlement. Upon the termination of this Agreement for any reason whatsoever, the Employee will be entitled to pay in lieu of any unused holiday entitlement. 2. Xidex will make contributions on behalf of the Employee into the Xidex Wales Employee Benefits Plan ("the Plan") in accordance with the Plan's Trust Deed and Rules. The Plan includes the benefit of pension, life assurance, and long term disability coverage. In the event of Xidex and/or Anacomp terminates the Plan, Xidex and/or Anacomp will ensure that the Employee is provided with the benefit of a similar benefits plan, which plan shall not be less 3 favorable than the Plan. A contracting out certificate issued under the Social Security Pensions Act of 1975 is in force with respect to the Employee's employment with Xidex. 3. Xidex will provide and maintain coverage from the Private Patients Plan or other similar private medical plan for the benefit of the Employee and his immediate family, the extent of the coverage being executive coverage, hospital band C. ARTICLE VI EXPENSES Xidex will reimburse the Employee for all reasonable expenses incurred in the performance of his duties hereunder, in accordance with the terms and conditions of Xidex's standard reimbursement policy (or if Xidex does not have such policy, Anacomp's standard reimbursement policy). Xidex will provide the Employee with a petrol payment card with respect to the Employee's business-related and private use of his car. ARTICLE VII INSURANCE In the event that the Employee is required to work abroad, Xidex or Anacomp will provide and maintain suitable insurance to cover all costs, expenses and liabilities, including legal fees, which might be incurred as a result of personal injury occasioned to or by the Employee, including loss of or damage to the Employee's property. Xidex shall at its expense provide full coverage for the Employee under Xidex's Travel and Accident Insurance Scheme. ARTICLE VIII REDUNDANCY In the event the Employee is terminated by reason of redundancy, Xidex will pay to the Employee, in addition to any payment required by Article X below, a lump sum payment in an amount equal to twice the Employee's Weekly Salary (as hereinafter defined) multiplied by the Employee's length of service (calculated in whole years). For purposes of this Article VIII, "Weekly Salary" shall be deemed to be the Employee's average, weekly cash compensation (Base Salary and Bonus) paid to the Employee during the preceding three (3) calendar years immediately prior to the redundancy. The Employee's Weekly Salary and length of service will be calculated as at the date of termination of the Employee's employment by reason of such redundancy. 4 ARTICLE IX TERMINATION OF EMPLOYMENT The parties agree that the Employee's employment with Xidex may be terminated as follows: 1. Without Cause. Xidex may terminate the Employee at any time without cause by giving the Employee not less than twelve (12) calendar month's notice in writing. 2. With Cause. Xidex may immediately terminate the Employee at any time "for cause", upon written notice to the Employee specifying the cause and the effective date of termination. As used herein, "for cause" shall mean: (a) The inability of the Employee due to ill health (as reasonably determined by the Board of Directors of Xidex) to perform the Employee's assigned duties on a full-time basis for any continuous period of one hundred and twenty (120) days or an aggregate of one hundred and eighty (180) days in any twelve (12) month period, which period shall commence on the Effective Date of Agreement and shall recommence upon every anniversary date of the Effective Date of the Agreement; (b) The willful and continued failure by the Employee substantially to perform his duties and obligations hereunder or the willful engagement by the Employee in gross misconduct. For the purposes of this subsection, no act or failure to act on the Employee's part shall be considered "willful" unless done or omitted to be done by the Employee in bad faith and without reasonable belief that his action or omission was in the best interests of Xidex. 3. Death. Death of the Employee shall automatically terminate this Agreement. 4. Resignation The Employee may terminate his employment at any time by giving Xidex not less than twelve (12) calendar month's notice in writing of his intention to resign. 5. Demotion, Transfer or Reduction in Compensation The Employee may at his option deem a demotion, a transfer or a reduction in compensation to be a termination of his employment by Xidex. 6. Sale of Xidex. If Anacomp sells substantially all of the assets of Xidex to an unaffiliated third party, or sells stock representing a controlling interest in Xidex to such a party, then in either such 5 case, the Employee shall continue to have the benefit of and be subject to Sections 1 through 5 of this Article IX and to Article X below. ARTICLE X PAYMENT AND OBLIGATIONS AFTER TERMINATION If the Employee is terminated by Xidex for cause pursuant to Section 2(b) of Article IX above or if the Employee resigns, then the Employee shall be paid only that part of the Employee's Base Salary accrued to the date of termination, and the Employee shall not be entitled to any month-end or year-end Bonus not already paid or fully earned except and to the extent required by law. If the Employee is terminated due to his death or for cause pursuant to Section 2(b) of Article IX above, then in addition to the Base Salary described in the foregoing paragraph, the Employee shall also be paid his Bonus on a pro rata basis computed to the date of termination. If the Employee is terminated by Xidex without cause or as a result of a Sale of Xidex, or if the Employee deems a termination to have occurred due to a demotion, transfer or reduction in compensation, then the Employee shall be entitled to termination pay equal to the Employee's previous twelve (12) months' total compensation, including Bonuses and fringe benefits, payable in lump sum, and all of his existing options to acquire Anacomp Common Stock shall immediately vest. All termination payments made pursuant to this paragraph of Article X shall be in full and complete payment of any and all claims that the Employee may have against Xidex or Anacomp regarding his employment or the termination thereof, and the Employee hereby expressly waives all rights that he may have to any other payments. All payments due to the Employee hereunder are absolute, and shall not be diminished or otherwise affected by virtue of the Employee securing alternative employment. For purposes of calculating this lump sum payment, the Employee's compensation for the preceding twelve (12) months shall be deemed to be: (i) with respect to Base Salary, the highest rate of Base Salary remuneration received by the Employee for any period of twelve (12) consecutive months within the three (3) calendar years immediately preceding the termination date; (ii) with respect to Bonuses, the largest Bonus received by the Employees for any period of twelve (12) consecutive months within the three (3) preceding calendar years immediately preceding the termination date; and (iii) with respect to fringe benefits, the value of such benefits received by the Employee during the twelve (12) month period immediately preceding the termination date. All payments required to be made to the Employee pursuant to this Article X, and any redundancy payments required to be made to the Employee pursuant to Article VIII above, shall be made within forty-five (45) days after the date of termination. If any such payments are not made during such time period, then interest will accrue on the sum due from the termination date and until paid at the rate of four percent (4%) above the base interest rate in effect at Barclays Bank Plc upon such termination date. The Employee agrees to return all property of Xidex and/or Anacomp, to a duly authorized representative of Xidex, including but not limited to, details or equipment, prices, specifications, programs, customer and prospective customer lists, and any other proprietary data or objects 6 acquired through the Employee's employment with Xidex within seven (7) days upon termination of the Employee's employment, whether the termination is with or without cause. ARTICLE XI RESTRICTIVE COVENANTS AND NON-COMPETITION; INVENTIONS AND IMPROVEMENTS; CONFIDENTIAL INFORMATION The Employee agrees to strictly abide by the covenants and provisions set out in Addendum II attached hereto and expressly incorporated by this reference herein. ARTICLE XII WARRANTIES AND REPRESENTATIONS OF THE EMPLOYEE The Employee hereby warrants and represents as follows: 1. That the execution of this Agreement and the discharge of the Employee's obligations hereunder will not breach or conflict with any other contract, agreement or understanding between the Employee and any other party or parties. 2. That the Employee has ideas, information and know-how relating to the type of business conducted by Xidex and Anacomp, and the Employee's disclosure of such ideas, information and know-how to Xidex and Anacomp will not conflict with or violate the rights of any third party or parties with respect thereto. ARTICLE XIII REMEDIES The parties agree that the remedy for any breach of this Agreement shall include actions in equity for injunctive relief as well as money damages. The remedies given to or reserved by Xidex, and Anacomp and/or the Employee hereunder shall be cumulative and not exclusive of any other remedy available under law. ARTICLE XIV NO WAIVER The failure of any of the parties to enforce at any time or for any period of time any of the provisions of this Agreement shall not be construed as a waiver of such provisions or of the right of the party thereafter to enforce each and every such provision. 7 ARTICLE XV BENEFIT This Agreement shall bind, benefit, and be enforceable by Xidex and Anacomp and their successors and assigns, and by the Employee and his heirs, executors, administrators and legal representatives. ARTICLE XVI SEVERABILITY Should any provision of the Agreement not be enforceable in any jurisdiction, the reminder of the Agreement shall not be affected thereby. ARTICLE XVII SURVIVAL The obligations contained in Articles X and XI hereof shall survive any termination of this Agreement. IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of the parties hereto upon the day and year first before written. SIGNED BY for and on behalf of Xidex U.K. Limited in the presence of: SIGNED BY for and on behalf of Anacomp, Inc. in the presence of: Signed by: Dr. Peter Williams in the presence of: 8 ADDENDUM I TO DR. PETER WILLIAMS' EMPLOYMENT AGREEMENT SCOPE OF EMPLOYMENT Xidex employs the Employee in the capacity of Vice President and General Manager of Operations. ASSIGNED RESPONSIBILITIES The Employee is responsible for managing the European Operations for Anacomp's Magnetics Group and for performing such other reasonable duties as may be assigned to Employee from time to time by Louis P. Ferrero, J. Mark Woods or P. Lang Lowery III, or any of such person's respective replacements, with such duties to be consistent with the Employee's position as Vice President and General Manager of Operations. LOCATION The Employee is based at Brynmawr, Gwent and shall perform his duties at Xidex's premises in Brynmawr. Xidex and/or Anacomp shall not, without the Employee's prior written consent, require him to perform his duties elsewhere, nor shall Xidex and/or Anacomp be entitled to require the Employee to relocate his residence without his prior written consent. In the event that the Employee agrees to relocate, Xidex agrees to reimburse him for all of his reasonable relocation expenses. BASE SALARY For all services rendered by Employee to Xidex under this Agreement, the Employee shall receive a Base Salary of 54,000 British pounds per year for the 1995 fiscal year that began on October 1, 1994, with such Base Salary to accrue on a day-to-day basis and to be payable to the Employee by credit transfer of equal monthly payments in arrears on or before the 15th day of each calendar month. The Employee's Base Salary will be reviewed at the beginning of each fiscal year, which for the avoidance of doubt is October 1st of each year. BONUS COMPENSATION In addition to his Base Salary, the Employee shall receive a minimum annual Bonus of 23,300 British Pounds for the 1995 fiscal year commencing October 1, 1994, based upon the Employee achieving 100% of his assigned objectives. The Employee's annual Bonus and objectives shall be established at the beginning of each fiscal year. The Employee's Bonus shall be payable to the Employee by credit transfer within 90 days of the end of Anacomp's fiscal year. 9 Subject to Article X hereof, if the Employee shall be employed under this Agreement for only a part of Xidex's fiscal year, then he shall be entitled to a rateable proportion (apportioned on a time bases) of the Bonus to which he would have been entitled if he had been employed for the whole of that year, payable to the Employee by credit transfer. If Xidex fails to pay the Employee any Base Salary or Bonus due under this Addendum I within thirty (30) days of its payment date, then interest will accrue on the sum from the due date and until paid at the rate of four percent (4%) above the base interest rate in effect at Barclays Bank Plc upon the date that the payment was due. 10 ADDENDUM II TO DR. PETER WILLIAMS' EMPLOYMENT AGREEMENT EMPLOYEE'S COVENANT NOT TO COMPETE UNFAIRLY OR DISCLOSE TRADE SECRETS The Employee acknowledges and agrees that all references in this Addendum II to "Anacomp" shall be deemed to include Anacomp, Xidex, and any other company in which Anacomp directly or indirectly owns a controlling interest. 1. The Employee acknowledges and agrees that it has had access to important competitive information and trade secrets maintained by Anacomp as proprietary and confidential, and the Employee specifically undertakes and agrees that during the twelve (12) months following the termination of his employment with Anacomp for whatever reason, the Employee will not, directly or indirectly, compete with Anacomp's Magnetics Business (as hereinafter defined) or enter the employ of or become financially interested in or affiliated or connected, directly or indirectly, with any business that is engaged in the Magnetics Business or that will compete in any manner whatsoever with the Magnetics Business of Anacomp. For purposes of this Agreement, the Magnetics Business of Anacomp shall be defined as the manufacturer, sale or distribution of magnetic media data storage products, including but not limited to (i) open reel tape, 3480 and 3490E data tape cartridges, and TK CompacTape data tape cartridges, (ii) rigid disk packs and cartridges, and Lark/RSD cartridges, (iii) voice logging tape, instrumentation tape and transfer tape, (iv) "cookies" used in the manufacture of flexible diskettes, and (v) flexible diskettes, optical and magneto-optical disks, and quarter-inch, 4mm and 8mm data tape cartridges, and any data storage products that are similar to or that replace any of the foregoing products. 2. For a period of twelve (12) months (or the maximum period permitted by law, whichever is less) following the termination of his employment with Anacomp for whatever reason, the Employee agrees that he will not combine or conspire with any person employed by Anacomp (or who was employed by Anacomp during the last six (6) months of the Employee's employment by Anacomp) for the purpose of undertaking planning for or organization of any business that will engage in the Magnetics Business or that will compete in any manner with the Magnetics Business of Anacomp. 3. For a period of twelve (12) months (or the maximum period allowed by law, whichever is less) following the termination of his employment with Anacomp for whatever reason, the Employee agrees that he will not, directly or indirectly, or by action in concert with others, induce or influence (or seek in to induce or influence) any person who is engaged (as an employee, agent, independent contractor, or otherwise) by Anacomp to terminate his or her employment or engagement and to enter the employ of or become affiliated or connected, directly or indirectly, with any business that is engaged in the Magnetics Business or that will compete in any manner whatsoever with the Magnetics Business of Anacomp. 11 4. The Employee specifically agrees that he will not, for a period of twelve (12) months following the termination of his employment with Anacomp for whatever reason, in any fashion, form, or manner, unless specifically consented to in writing by Anacomp, either directly or indirectly use or divulge, disclose or communicate to any person, firm, or corporation, in any manner whatsoever, any confidential information of any kind, nature or description concerning any matters affecting or relating to the business of Anacomp including, without limiting the generality of the foregoing, the names, buying habits, or practices of any of its customers, its marketing methods and related data, the names of any of its vendors or suppliers, costs of materials, the prices it obtains or has obtained or at which it sells or has sold its products or services manufacturing and sales costs, lists or other written records used in the business of Anacomp, compensation paid to employees and other terms of employment, or any other confidential information of, about, or concerning the business of Anacomp, its manner of operation, or other confidential data of any kind, nature or description, the parties hereto stipulating that as between them, the same are important, material, and confidential trade secrets and affect the successful conduct of the business of Anacomp, and its goodwill, and that any breach of any term of this paragraph is a material breach of this Agreement. All equipment, notebooks, documents, memoranda, reports, files, samples, books, correspondence, lists, other written and graphic records, affecting or relating to the business of Anacomp, which the Employee shall prepare, use, construct, observe, possess, or control shall be and remain Anacomp's sole property. For purposes of this section 4 and any subsequent Sections of this Addendum II, the "business of Anacomp" shall be deemed to be the business conducted by Anacomp as a whole, including the Magnetics Business. 5. The Employee acknowledges and agrees that all experiments, developments, formulas, patterns, devices, secret inventions and compilations of information, records, and specifications created by or disclosed to the Employee during his employment with Anacomp are Anacomp trade secrets, which the Employee hereby agrees that he will not disclose, directly or indirectly, or use in any way, for a period of twelve (12) months following his termination as an employee of Anacomp for whatever reason. 6. The Employee further acknowledges and agrees that all improvements, discoveries, systems, techniques, ideas, processes, programs and other things of value made or conceived in whole or in part by the Employee while an employee of Anacomp shall be and remain the sole and exclusive property of Anacomp, and he will disclose all such things of value to Anacomp and will cooperate with Anacomp to ensure that the ownership by Anacomp of such things of value is protected. Upon termination of his employment with Anacomp, all of the property and other things of value of Anacomp in the Employee's possession or control, including but not limited to property and other things of value relating to the business of Anacomp and its trade secrets, shall be immediately delivered to Anacomp. Nothing in this Section 6 is meant to apply to an invention for which no equipment, supplies, facility, or trade secret information of Anacomp was used and which was developed entirely in the Employee's own time, and (a) which is not related (1) to the business of Anacomp or (2) to Anacomp's actual or demonstrably anticipated research or development, or (b) which does not result from any work performed by the Employee for Anacomp. 7. For a period of twelve (12) months (or for the maximum period permitted by law, whichever is less) following his termination as an employee of Anacomp, the Employee agrees that he will not directly or indirectly, either for himself or any other person, firm, 12 or corporation, divert or take away or attempt to divert or take away, call on or solicit or attempt to call on or solicit any of Anacomp's customers or patrons, including but not limited to those upon whom he has called or whom he solicited or whom he catered or with whom he became acquainted while engaged as an Employee in the business of Anacomp. This restriction shall not apply unless the Employee has entered the employ of or become financially interested in or affiliated or connected, directly or indirectly, with any business that is engaged in a business that competes with the business of Anacomp. 8. Anacomp's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, or prevent Anacomp thereafter from enforcing each and every provision of this Agreement. 13 EX-21.1 3 LIST OF SUBSIDIARIES EXHIBIT 21.1 SIGNIFICANT SUBSIDIARIES OF ANACOMP, INC. Percentage of State or Country Voting Securities Name of Incorporation Owned * Anacomp, GmbH Germany 100% Anacomp Limited United Kingdom 100% Anacomp, S.A France 100% COM-Informatic, A.G. Switzerland 100% * Directly or indirectly EX-23.1 4 EXHIBIT 23.1/CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated November 20, 1998 included in Registration Statement File No. 333-19061. It should be noted that we have not audited any financial statements of the Company subsequent to September 30, 1998 or performed any audit procedures subsequent to the date of our report. Arthur Andersen LLP Indianapolis, Indiana, December 28, 1998. EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANACOMP, INC.'S SEPTEMBER 30, 1998 FORM 10-K ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1998 OCT-01-1997 SEP-30-1998 22,006 0 90,049 5,299 28,618 145,695 61,819 20,070 421,153 129,142 338,884 0 0 143 (47,635) 421,153 499,017 499,017 332,627 526,376 517 0 32,259 (60,135) 6,500 (66,635) 0 (1,114) 0 (67,749) (4.85) (4.85)
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